Richard North, 22/02/2019  
 


No sooner had I published a cautionary tale about the UK being caught up in the fringes of a global recession, to add to our Brexit woes, then we were seeing this report, telling us that the UK government had enjoyed the largest January public accounts surplus since records began.

This embraced not only a record for self-assessed income tax and capital gains tax receipts, but also for VAT and corporation tax. And it means that with only two months of the financial year left, the UK has borrowed £21.2 billion — £18.5 billion less than last year and the lowest since 2001.

Borrowing now looks likely to come in £3 billion below that, a near £15 billion improvement in only 12 months, the deficit ending up roughly one percent of GDP. Potentially, that gives the chancellor a little extra headroom against his fiscal rule to borrow more to cushion the blow of a no-deal Brexit, should he need it.

The news has been quickly seized upon by sundry "leavers" as further evidence that Project Fear was "busted", dismissing the naysayers who would have it that Brexit presages the end of the world. Certainly, with Brexit a little over a month away, there are conflicting signals. Record employment, rising wages and buoyant retail sales – after a disappointing Christmas – do not support the idea of the UK economy being on the ropes.

But what is interesting is that, while the scale of the current surplus is very welcome, it came as a complete surprise to the professional pundits, many of whom were forecasting a mere £10 billion. And, while there is always room for speculation, when it comes to the crunch, this means that we lack an in-depth understanding of how the real economy is actually working.

There are things happening which are not being properly observed or evaluated and which, therefore, are confounding accurate performance measurement.

One thing we do know, though, is that there is an inverse correlation between retail spending and spending on "big ticket" items such as cars. Retail is up, cars are down. Yet, personal savings are down and unsecured household debt is considered to be at crisis level. Standing at 30.4 percent of household income, it is at the highest it's ever been, and above the level it reached in 2008 ahead of the financial crisis, when it stood at 27.5 percent.

High consumer spending, therefore, is being built on a mountain of debt which, in the longer term must be unsustainable. And the reason for the increased take in corporation tax may be because tax-deductible investment is down. That also has implications for the longer term.

In these uncertain times, some spending at personal and business levels is being dedicated to stocking up on essential items. With industry building up reserves, this may be partly responsible for buoyant employment.

On that basis, any optimism over the current surplus may be misplaced. What we could be seeing is a pre-Brexit bubble, where performance for the rest of the year will be heavily influenced by the nature of the Brexit settlement. And a no-deal could be the trigger that precipitates a deep recession.

Bluntly, though, no one actually knows. It is significant that the car industry in 2015 was looking forward to a half-decade of sustained, year-on-year growth yet, two years later, was moving into recession. We can have absolutely no confidence that the basic workings of our economy are fully understood.

Post-Brexit economic models, therefore, will be about as valid as artists' impressions of the dark side of the moon before we sent up lunar probes to have a look. Instead, we need to rely on political scenarios, from which we can estimate order of magnitude effects.

Here, at least, we're beginning to burn through the uncertainty – but only in the sense that the little optimism that there was has almost completely evaporated, leaving no-deal as the prevailing expectation, with Commission president Juncker admitting to "Brexit fatigue".

Following abortive discussions with Mrs May on Wednesday evening, he openly conceded that talks were making little progress and described Brexit as "deconstruction", a thing of the past rather than the future. To all intents and purposes, the man has given up, and is no longer expecting any significant developments.

Nevertheless, there are to be more talks before the end of the month although expectations are so low that there is scarcely any interest in them. The UK media, in any event, needs little excuse to immerse itself in Westminster politics but, with the absence of any progress in Brussels, there is no prospect of another Commons vote on the withdrawal agreement before the end of the month.

But just to keep the soap opera rolling, Mrs May is travelling to the Red Sea resort of Sharm el-Sheikh where she will meet the EU-27 leaders on Sunday during a two-day summit with the Arab League. At one time, this had been flagged up as another opportunity for brokering a breakthrough but now Downing Street is writing off any possibilities of a deal.

This will not stop the media indulging in another bout of speculation, as celebrity journos soak up the late winter sunshine. The trouble is, though, that Juncker is by no means the only one suffering from Brexit fatigue. The comings and goings of the different parties invoke nothing more than a feeling of endless tedium. Mostly, ordinary people are yearning for the drama to be over and some semblance of normality to be restored.

An unintended consequence of this is a gradual desensitisation of the no-deal scenario. The market for no-deal horror stories is well past saturation and people are getting to the point where they neither believe nor disbelieve them. They are just way past caring, and can no longer dredge up any interest in what they are being told.

Even the suggestion that as many as 25 government members are poised to revolt hardly provokes any interest. This is the "cry wolf" syndrome with a vengeance. We have heard it so many times before that it barely has any impact any more.

These revolting ministers – four at cabinet level – are pushing the fiction that it is possible to take a no-deal off the table, with a debate scheduled for the Wednesday where there may be another attempt to float a motion requiring the prime minister to seek an extension to the Article 50 negotiation period.

Mostly, though, this is a Westminster preoccupation. Few outside the bubble want to see the Brexit torture prolonged, and there is that minor detail of having to secure unanimous approval from the EU-27.

Before that hurdle is confronted, Mrs May would have to decide on whether she will concede the constitutional issue of allowing parliament to instruct her on a matter which is ostensibly subject to Crown prerogative.

Rather than a simple matter of Brexit fatigue, therefore, we may be dealing with something much more insidious – no-deal fatigue, where we end up with that scenario simply because Brexit is so well and truly broken that there is no way of stopping it.

Analogous to metal fatigue, fracture occurs after it has been weakened by repeated stresses, far beyond the design tolerance. Even the strongest steel can give way once fatigue sets in and Brexit looks to be no different. The process can no longer resist the repeated stress and simply gives way.

In aviation, this can very often be catastrophic, as with the tragic incident (pictured) when the wing of a C-130 fire bomber fractured at the root, the resultant crash killing all three crew. Albeit, without the loss of life, no-deal fatigue is set to be catastrophic in its own way.






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