An excellent economist but that doesn't mean all his ideas are right By Official Portrait -, Public Domain,

Given the manner in which The Observer generally thinks that governments should manage the economy through fiscal policy – a rough and crude description of Keynesian economics – it’s a bit of a surprise to find them attempting to disprove a central point within Keynesian economics. But that’s what they’re trying here, even if they don’t note it. Or understand it perhaps.

The point being made is that Brexit means businesses are stockpiling. Hey, maybe that chaos at the ports will really happen – no, we don’t think so but. Stocking up by business is a part of the business cycle. It produces GDP growth, it most surely does. So, we’re getting extra GDP growth as a result of the stocking up of business ahead of that possible Brexit chaos.

The assumption is then that business will destock once Brexit has happened and what goes up must come down. Thus we’ll get less growth in the future. Note the underlying assumption here. Brexit won’t cause chaos, we’ll not get a permanent increase in trade barriers either, so that the stocking up is entirely precautionary. Which is an interesting admission in itself.

The theory behind the CEBR report is that companies have a reason to stockpile – and virtually no cost of doing it while interest rates remain near zero. There is little history to go on because it’s unusual to have an economic event looming that can be quantified in its effects from mild to disastrous. Usually economic events come as a surprise and companies, faced with a collapse in consumer demand and nervous banks that refuse credit, react by running down their stockpiles.

The CEBR chairman and economist, Douglas McWilliams, accepts that his report is based on “anecdotal evidence, surveys and intuition” but still believes GDP will be 0.5% on average above the underlying trend over the three quarters from July 2018 to March 2019.

There is a cost to bringing forward billions of pounds worth of purchases, and that will be a reduction in GDP by the equivalent amount during the rest of 2019.

“This makes a post-Brexit mini recession almost inevitable,” he says.

Well, isn’t that interesting? Except think of what Keynesian economics also tries to tell us. That having more economic activity now has multiplier effects. That stocking up now means more people are employed now which leads to more money circulating and this carries on into permanently higher growth by drawing forward that growth which would happen in the future. Yet here we’ve an insistence that this extra growth now won’t lead to that at all. There are no multipliers. We can move growth around in time but no more than that.

The assertion is that a core principle of Keynesian economic management doesn’t in fact work. Well, OK, that’s fine, it’s just that we shouldn’t believe them next time they assert there is, right?

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Businesses make profits through the conversion cycle. A service business does this by buying labour and selling it at a profit. A manufacturing or trading business does this by buying raw materials and finished products and selling them at a profit. While inventory is sitting on a shelf it doesn’t make profit because it isn’t being converted into debtors book and from there into cash and from there into paying creditors and from there into stocks of raw materials and finished goods. When the economy as a whole is increasing days’ stock on hand there are some winners, those whose… Read more »


Yes, stocking up both requiress more acquisition and production and implies destocking in the future.

Brexit does carry a perceived risk, as it is not certain that the UK will have provisions in place on Day One to replace all EU procedures under which the UK now imports.

However, Day One is still half a year away, and measuring something and telling us what people are thinking is dicey.