Advertisement
UK markets close in 3 hours 14 minutes
  • FTSE 100

    7,954.13
    +22.15 (+0.28%)
     
  • FTSE 250

    19,852.23
    +41.57 (+0.21%)
     
  • AIM

    743.05
    +0.94 (+0.13%)
     
  • GBP/EUR

    1.1690
    +0.0021 (+0.18%)
     
  • GBP/USD

    1.2638
    -0.0000 (-0.00%)
     
  • Bitcoin GBP

    55,942.31
    -397.85 (-0.71%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • DOW

    39,760.08
    +477.75 (+1.22%)
     
  • CRUDE OIL

    82.61
    +1.26 (+1.55%)
     
  • GOLD FUTURES

    2,234.50
    +21.80 (+0.99%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,488.04
    +10.95 (+0.06%)
     
  • CAC 40

    8,223.89
    +19.08 (+0.23%)
     

So What's Fishy About Treasury Brexit Report?

The important thing to remember about "Project Fear" - the name sometimes given to the Government's effort to scare (they would say enlighten) people about the consequences of Britain leaving the EU - is that it's not primarily designed to change your mind.

For months, the big worry for the Remain camp has been that many people who, on balance, would probably vote to stay in the EU, simply won't turn up to vote on 23 June.

Generally speaking, people are far keener to go out and vote when they believe they are voting for change, rather than just maintaining the status quo.

:: Osborne: Brexit Could Kill 820,000 Jobs

ADVERTISEMENT

So while the Leave camp could always count on decent turnout, a low proportion of voters could easily result in a Leave vote.

And that's where Project Fear comes along. It (Other OTC: ITGL - news) is designed to get those who would otherwise stay at home to get out and vote.

And when it comes to Project Fear, Monday's Treasury report on the short-term impact of Brexit was always going to be the key document.

After all, it's one thing to say (as the previous Treasury long-term analysis did) that you might be a bit worse off by 2030; it's another to say your earnings will fall, your house price will tumble and you may even lose your job in the next two years.

No surprise, then, that those are the main headlines surrounding the Treasury's short-term impact analysis today.

Like the long-term analysis of last month, this is a tough, weighty tome chock full of equations (for those who care about such things, this time around it's vector regression as opposed to gravity modelling).

It is, technically speaking, not a forecast but a scenario analysis, comparing the economy with how it would have been otherwise, all else equal.

And that means one has to be a little bit careful with some of the numbers.

When the Treasury says growth will be "hit" by 3.6% over two years, that means a relative fall compared with how things would otherwise have been.

In practice, this means a very mild recession, with the economy contracting by 0.1% for four quarters in a row, compared to the current official forecast for 0.5% growth in the first two quarters and then 0.6% growth in the third.

When the Treasury says house prices might be "hit" by 10% over two years, this has to be compared with an OBR forecast for house price growth of 10% over that period.

In other words, house prices would simply be flat. Similar thing for earnings: that "hit" cited in the document would really just mean earnings would be flat.

In other words, delve into the small print of the Treasury document and it's actually far less terrifying than you might have thought.

Even (Taiwan OTC: 6436.TWO - news) the "severe shock scenario" which the Treasury has also maps out involves a far smaller recession than the 2008/9 slump, with the contraction about similar to the one in the early 1990s and the house price crash smaller than most crashes in UK economic history.

:: Do You Have An EU Question For PM? Ask Here

It is almost, dare one say, as if the Treasury is presenting the numbers in a way that makes leaving the EU sound even scarier than it would actually be. Which brings me to a few fishy things about its paper.

The first is that the document doesn't take any account of the fact that the Bank of England would almost certainly cut interest rates in the event of a recession. That the Government would probably do something to absorb the blow, cutting taxes or temporarily raising spending.

These emergency actions would doubtless make the likely recession far shallower than these scenarios imply.

Second, and perhaps more suspiciously, the Treasury has simply chosen to ignore what many see as the most likely outcome: that Britain leaves the EU and remains in the European Economic Area (the EEA, or single market), a little like Norway.

This is odd given that in its long-term impact analysis last month it mapped out the consequences of three paths: the EEA option, the bilateral agreement option (a bit like Canada) and simply following World Trade Organisation rules.

This time around, the "shock" and "severe shock" scenarios correlate directly with the Canada and WTO paths, but that EEA option is ignored.

According to Treasury insiders, this is because many in the Leave camp have implied that in the event of departure they would also leave the single market.

:: Treasury Report In Full

For a great economic institution like the Treasury, this is oddly inconsistent, and leaves one wondering whether the short-term impact of leaving the EU and becoming a bit like Norway might actually have been very small indeed.

We shall never know.

Still, the Treasury has at least steered clear of the more apocalyptic scenarios that some have mentioned if the UK were to leave the EU.

Some have speculated that there could be a so-called "sudden stop", where foreign investors stop buying UK government debt, as they did in the recent Greek crisis.

The Treasury stopped short of including this in its main scenarios. The upshot is that, when you dig into this document, it is far less scary than it looks on the surface.

Whether that will make any difference to Project Fear is another matter.