BREXIT has worsened inflation in the UK and will be remembered as a “historic” economic mistake, an esteemed US economist has said.
Larry Summers – whose extensive CV includes time as the United States secretary of the treasury, president of Harvard University, and chief economist of the World Bank – gave the dire diagnosis of the UK’s economic health on Thursday morning.
He said: “I think the UK economic policy has been substantially flawed for some years. I think Brexit will be remembered as a historic economic error.
“It reduced the competitiveness of the UK economy, put downwards pressure on the pound and upwards pressure on prices. [It] limited import goods, limited in some ways the supply of labour, all of which contributed to high inflation. All of which [was] reinforced by very ill-judged monetary policies that were substantially too expansionary for too long.”
A glowing review of Brexit from Larry Summers…
But what would Larry the US economist who served as the Secretary of the Treasury, director of the National Economic Council and president of Harvard University know anyway?
— Marina Purkiss (@MarinaPurkiss) June 1, 2023
Summers was then asked about Chancellor Jeremy Hunt’s argument that interest rates rising for a longer period would be better because it can help to bring down inflation.
The top US expert replied with a metaphor. “I think that there’s a lesson from experiences we’ve all had in being prescribed a course of medication,” he said.
“Usually when you’re prescribed a course of medication, even if the drugs are not so pleasant themselves, even if they usually have some side effects, it’s usually better to take the whole course of medicine the first time it’s prescribed than to stop taking the medicine early and risk a recurrence of the underlying infection … the medicine [is] interest rate rises.”
Summers further said he would be “surprised” if the UK could make it through two more years without entering an economic recession.
Recent data from the ONS showed that the Consumer Prices Index (CPI) put UK inflation at 8.7% in the 12 months to April 2023. This was higher than the US or the euro zone.
In the 20 countries that use the euro currency, inflation was at 7% in the same month, according to the European Union’s statistical agency Eurostat.
In the US, the labor department reported an inflation rate of 4.9% in the 12 months to April 2023.
The news comes as the downturn in UK manufacturing deepened, with activity falling to a four-month low in May as post-Brexit trade checks weakened overseas demand.
The closely-watched S&P Global/CIPS UK Manufacturing PMI survey showed a reading of 47.1 in May, down from 47.8 in April.
Any score above 50 indicates the sector is growing, whereas a reading below that figure means it is shrinking.
The hard-hit manufacturing sector has been in negative territory for 10 months in a row, as a prolonged dip in demand has caused new orders to plunge.
It comes despite supply chain issues beginning to ease for firms in Britain.
“Manufacturers are finding that any potential boost to production from improving supply chains is being completely negated by weak demand, client de-stocking, and a general shift in spending in the UK away from goods to services”, said Rob Dobson, director at S&P Global Market Intelligence.
Furthermore, demand from overseas exporters fell for the 16th consecutive month in May, and at the fastest rate since January.
Dr John Glen, chief economist for CIPS (Chartered Institute of Procurement & Supply), suggested it shows that customers in the EU have become “tired of additional administrative Brexit checks”.