Brexit: long term vs. short term

As I’ve tried to point out, while there are clear reasons to believe that Brexit will make Britain somewhat poorer in the long run, it’s not obvious why this should lead to a recession in the short run. I’ve gotten some thoughtful responses, but they’ve only raised more questions. And I have to say that quite a lot of the reactions I’ve received have involved strange failures of reading comprehension. It’s as if economists simply can’t process the proposition that what’s bad in the long term might not have obviously bad consequences in the short term.

So let me give an example of the kind of analysis that I think should raise eyebrows: BlackRock’s dire warnings about Britain’s slump. According to a recent article from Reuters: “Britain will fall into recession over the coming year and growth in each of the next five years will be at least 0,5 percentage points lower as a result of Britain leaving the European Union, BlackRock said on Tuesday.

“ ‘Our base case is we will have a recession,’ Richard Turnill, chief investment strategist at the world’s largest asset manager, told reporters at the firm’s investment outlook briefing. ‘There’s likely to be a significant reduction of investment in the U.K.,’ he said, adding that Brexit will ensure political and economic uncertainty remains high.”

When we say “uncertainty,” what do we mean? The best answer I’ve gotten is that for a while, until things shake out, firms won’t be sure where the good investment opportunities in Britain are, so there will be value to waiting.

Let’s make this a little more concrete: Suppose you think Brexit might have seriously adverse effects on service exports from the City of London. This would mean that investment in, say, London office buildings would become a bad idea. On the other hand, it would also mean a weaker pound, making investment in industrial properties in the north of England more attractive. But you don’t know how big either effect might be, so you defer both kinds of investment, pending clarification.

That’s a coherent story, and it could lead to a recession next year.

At some point, however, a situation like this clarifies. Either we see financial businesses exiting London and it becomes clear that a weak pound is here to stay, or the charms of Paris and Frankfurt turn out to be overstated, and London goes back to what it was. Either way, the pent-up investment spending should come back. This doesn’t just mean that the hit to growth is temporary: There should also be a bounce-back, a period of above-normal growth as the delayed investment kicks in.

Since some people seem unable to read what I’m saying, this should happen even if the negative scenario holds. It’s the resolution that should produce the delayed boom, whichever way that resolution goes.

But that’s not what BlackRock, or almost anyone else, seems to be saying. They’re projecting lower growth as far as the eye can see.

They could be right. But I still don’t see the logic. It seems to me that “uncertainty” is being used as a catchall for “bad stuff.”