The Brexit Recession, the Bank of England and the Tories

With his newfound majority, and barring some sort of freak scandal in the next few weeks that brings down the government, Boris Johnson will pull Britain out of the European Union on 31 January.

Let's be clear: Johnson's Brexit deal – which he cobbled together as prime minister after relentlessly attacking the slightly better deal of his predecessor, Theresa May – is a bad deal. Non-tarriff trade barriers will increase as a result of Britain exiting the customs union, with aggregate trade expected to fall 13%. GDP per capita is expected to fall 6.4%. Income-per-capita is expected to be 2.5% lower under his deal than it would if Britain remained in the EU. In real terms, this means UK citizens will be an average of £2,000-a-year worse off.

If that wasn't bleak enough, things look worse when you put Johnson's Brexit in the broader context of the global economy. Right now, the global economy is in what the IMF has called a "synchronised slowdown". In October, the organisation downgraded growth to 3% – the slowest since the financial crisis – owing to geopolitical tensions, increased barriers to trade and a sharp decline in manufacturing output.

Britain is already feeling the effects of the global slowdown and prolonged uncertainty. Growth was just 0.3% in the third quarter of 2019, and in the last quarter the economy slowed even more. The Bank of England estimates the UK grew just 0.1% in the final three months of last year. We're already teetering around the edges of a recession – so what's going to happen when we leave the EU at the end of the month?

One thing is almost certain: if Britain were to leave the EU without a deal this month, we'd go into recession. Under Johnson's Brexit deal, however, the UK will keep its current trading relationship with the EU until the transition period ends on 31 December. This will give the government some time to draw up a new trade agreement with the EU. But as mentioned earlier, any agreement would throw up more barriers to trade – and 11 months is an extremely tight deadline to finalise an agreement. It's unlikely the Brexit uncertainty will abate now the election is over, because the next questions are these: will an agreement with the EU be finished by the deadline, and if so, what will that agreement look like?

Threadneedle Street and the Conservative Party

If the global slowdown continues, and Johnson fails to finalise a deal by the deadline (not to mention draw up trade agreements with other countries), a recession isn't at all out of the question. And should one come to pass, the UK will be in an extremely weak position to do anything about it.

The reasons are twofold. First, there is precious little room for monetary policy to move in order to stimulate the economy. Interest rates are currently at 0.75%, which (needless to say) is very low. Any further reduction could scare off lenders and any stimulus would be minimal at best. Despite being originally intended as an emergency step, the Bank of England is still carrying out QE, leaving the central bank poorly-equipped to handle another downturn.

The second reason follows from the first. Ineffective monetary policy logically calls for more robust fiscal policy to counter economic crises. But let's not forget who's calling the shots. After a decade in power, the Tories have starved the UK of public investment. Despite interest rates that would have any sensible government jumping at the chance to borrow, the Conservatives have refused to take the opportunity, leaving infrastructure crumbling, public services in crisis and the private sector sheepish. The Tories' fiscal record since 2010 should unnerve anyone thinking about what the next recession might look like in the UK.

Now, it is true the Tories pledged to increase spending on infrastructure and the NHS in the election campaign. But how much that calms your nerves depends on how much you trust the Conservative Party to carry out its pledges. Take housing, for example. In 2015, David Cameron pledged to build 200,000 'starter homes' by 2020. How many were actually built? Zero. Or how about George Osborne's 'Northern Powerhouse' initiative, ostensibly aimed at revitalising the north of England? The north-south divide has widened, and public spending cuts have undermined the project significantly. More money for the NHS and infrastructure would be a welcome change for public services on their knees, but whether the Conservatives will actually pay up remains to be seen.

The Brexit Recession and Public Opinion

For nearly 10 years, the Tories have always had an answer when challenged about their economic record: that Labour left the country in such a poor state any failures under the Coalition and beyond were simply a result of Gordon Brown's handling of the public finances. 

Up to now, that strategy has paid off emphatically. But if Johnson's Brexit leads the UK to another recession, will it work then? That remains to be seen, but I err on the side of optimism. It will have been 12 years at least since the financial crisis when that happens, and I suspect the public will begin to point their fingers at the Tories if things start to go wrong.

With that in mind, Labour supporters have cause for a sort of bittersweet optimism. But who knows? The Tories have an 80-seat majority. Right now the left should strap in and brace for the journey ahead.