Brexit adds to gloom over long‐term growth prospects

Abstract

The prospect of continued weak productivity growth and less support from rising labour supply means we are relatively gloomy about medium‐term growth prospects. Our forecasts show potential output growth of just 1.6% a year from 2017–2030. This would be well below the average of the decade prior to the financial crisis (2.7%) and in line with our estimate for the 2007 and 2016 period which included the global financial crisis. We have become more pessimistic about the extent to which growth in total factor productivity is likely to accelerate. This is partly due to a judgement call that more of the weakness since the financial crisis reflects structural factors. Brexit is also likely to weigh on long‐term prospects, resulting in a degree of trade destruction and lower FDI inflows than would be the case were the UK to remain in the EU. Brexit is also likely to result in less capital deepening. Demographic factors also point to weak potential output growth moving forwards. High levels of inward migration have mitigated the impact of an ageing population recently. However, immigration is likely to fall sharply over the next decade, as first an improving European labour market reduces incentives to migrate and then the UK Government adopts more restrictive immigration policy. We are also coming into a period where there will be fewer increases in state pension age than of late. Since the mid‐1990s there has been a surge in the number of people going to university, resulting in strong contributions from human capital. But this will be less important moving forwards as university admissions reach a ceiling. Stronger growth in potential output would be possible if Brexit results in trading arrangements which are closer to the status quo, or if policy is more ‘liberal’, than our baseline assumptions.