Confidence is the magic ingredient in economics. When there is collective faith in the future, shops sell their stock, cranes crank into action, and credit can be turned on like a tap. The moment doubt sets in, however, inventories pile up, building projects are postponed, and “credit” is rebranded as “debt”. In announcing on Tuesday that the risks of Brexit had begun to “crystallise”, the Bank of England governor, Mark Carney, had in mind a run of specific dangers concerning the banks, cross-border investment and a plunging pound; as much as anything, however, he was referring to a frightening swing inHomo sapiens sentiment.
The commercial property market is, very often, a good place to gauge the mood – if the presumption is that a shop, factory or office will turn a good profit, then the land that it sits on automatically looks like a better buy too. Post-referendum, however, owners are marking down the value of their buildings and land, and funds which allow ordinary investors to dabble in these – first Standard Life, then in short order Aviva too – have begun locking them in, barring sales out of fear of a stampede to the exit.
Britain remains in the EU for another two years at least, and so this evidence of sinking spirits about immediate prospects – which is confirmed by a dive in YouGov’s tracker of firms’ expectations – is, at first blush, a bit of a puzzle. Sure, there is potential for disruptions to trade down the road. That danger, however, is not yet upon us. The immediate anxiety is not so much about Brexit itself as the political paralysis that has set in since the vote. The vacancy at No 10, and the simultaneous lack of a credible government in waiting on the opposition benches, is only the beginning. More fundamentally, it is now brutally clear that there is not a plan – no plan for how or when Britain leaves, no plan for future relations with Europe, and no plan at all for how a political assent might be secured for any of the imperfect options on offer. All of these blanks will somehow have to be filled, and at a time when traditional party discipline has collapsed. The government starts out with a tiny parliamentary majority, and no foreign policy, because the cornerstone of British diplomacy for half a century has just been smashed. It is newly rudderless on the economy too, George Osborne and various Tory leadership contenders having suddenly thrown the austerity ambition overboard, and yet remains saddled with all sorts of nasty distractions which no government can ignore for ever – like airport expansion, NHS funding and future energy supplies.
In the more tranquil pre-crisis years, the assumption might have been that the economic technocrats could steer us through choppy political waters. But with official rates on the floor, and magicked-up QE money having already swelled asset prices and sunk government borrowing costs, the Bank of England has less in its arsenal today. Indeed, Mr Carney conceded on Tuesday that the outlook for growth, jobs and wages depended much more on decisions right across the private and public sector than on anything the Bank could do. Threadneedle Street can, and did, support the banks by easing capital requirements, but muddling through the here and now with such moves could, of course, come at the expense of increased exposure in the next crunch. There are, meanwhile, no serving officials at all who have ever cut a go-it-alone trade deal for the UK before. Whitehall is thus scrambling around for consultants to help with what David Cameron calls “the most important task the British civil service has undertaken in decades”.
The deepest worry of all, perhaps, is that this could be the moment where all the old imbalances – the bias towards shopping over making, finance over industry, and south over north – begin to catch up with the UK. Over the course of a generation, all of these skews have fed a stubborn and widening current account deficit, the mark of a country chronically unable to pay its way in the world. Until now, a mix of breezy over-confidence at home and indulgence abroad, from overseas investors who could be relied on to provide finance for as long as sterling-denominated assets and UK property looked like good things to hold, enabled Britain to avert its eyes from this overdraft.
But things would soon change if the decision to cut loose from the continent triggers self-doubt at home and, at the same time, causes the illusions of foreigners about the safety and saleability of UK assets to drop away. A land which cut itself off from the continent would then learn the hard way that, when it comes to the confidence thing, no island is an island.