Krugman Blows Up Bad BlackRock Brexit Analysis

Krugman is actually pretty good here in the part I have excerpted:

OK, I am still finding it hard to understand the near-consensus among my colleagues about the short- and medium-term effects of Brexit...quite a lot of the reaction I’ve received has involved strange failures of reading comprehension; it’s as if economists simply can’t process the proposition that what’s bad in the long run might not have obviously bad consequences in the short run.

So let me give an example of the kind of analysis that I think should raise eyebrows: BlackRock’s dire warnings about UK slump:

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 UK,” 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 have shaken out, firms won’t be sure where the good investment opportunities in Britain are, so there will be an option value to waiting.

Let’s be slightly spuriously 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 both kinds of investment are put on hold, pending clarification.

OK, that’s a coherent story...

At some point, however, this situation clarifies. Either we see financial business 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 that was put on hold 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.

And again, 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.