The CBI reported today that manufacturers’ business confidence has fallen at its fastest rate since early 2009, causing falls in investment and hiring plans. This corroborates surveys by Deloitte, Markit (pdf), the Institute of Directors and, to a lesser extent the Bank of England* all of which suggest that the Brexit vote will depress economic activity. This shouldn’t be surprising: uncertainty is bad for the economy.
What worries me is that the pain of this will disproportionately hit the low-paid. A new paper (pdf) from the Minneapolis Fed says:
It is precisely the households at the bottom of the wealth distribution with low savings rates and high propensities to consume out of current income that suffer the largest welfare losses from a severe recession. Further, these losses are much more severe than those sustained by the "average" household.
This is because the low-paid have no financial assets to cushion themselves against job loss and so must suffer either big falls in living standards or resort to high-cost payday lenders whereas the rich have savings and/or access to cheaper credit**. Also, firms faced with uncertainty might well respond by hoarding skilled labour – which is harder to find when needed – and trimming unskilled workers.
Although the coming downturn will probably not be as severe as the 2009 one, I suspect that these mechanisms will still operate.
What’s more, conventional macroeconomic policy can do little about this. Although Philip Hammond says he’ll “reset fiscal policy” he won’t do so until the Autumn Statement, by which time the downturn will be well under way. Nor can monetary policy provide much support: Bank economists have estimated that a quarter-point cut in Bank rate adds less than 0.2% to output. There’s a reason why Mark Carney has said:
There are limits to what the Bank of England can do. In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock.
And from the point of view of inequality, QE would only make things worse. Insofar as this supports the economy, it does so by raising asset prices. And the beneficiaries (pdf) of this, unsurprisingly, are those who own assets – the rich.
For these reasons, economic forecasters have cut their predictions for GDP growth next year, from 2.1% to 0.8%, despite expecting a policy loosening.
So, why might this not hit poorer workers harder? One possibility is that uncertainty might see an increase in the labour-capital ratio as firms postpone expensive capex projects and use cheap labour instead. Also, because there’s a lot of churn at the bottom end of the labour market, some of the redundant low-paid workers might step quickly into new jobs.
What’s more, for now we are only seeing the short-run effect of increased uncertainty. In the long-run, it’s possible that by depressing world trade growth, the losers from Brexit will be those in more skilled manufacturing and finance jobs.
For now, though, it might be the low-paid that suffer the most from Brexit. These, though, were more likely (pdf) to have voted Leave. We might ask them Johnny Rotten’s famous question: ““Ever get the feeling you’ve been cheated?”
* The Bank’s survey found that most firms didn’t think Brexit would affect their capex or hiring plans. I take no comfort from this. As Geroski and Gregg showed in their great book, Coping with Recession, recessions happen because a few firms suffer badly, not because all suffer mildly. In the 1991 downturn, 10% of firms accounted for 80% of the gross drop in sales.
** Yes, I know the overlap between the low-paid and low incomes isn't perfect. But the point still holds, mostly.