Brexit at Ten: Still waiting for the dividend

We are now a decade on from the Brexit referendum, as a topic which fuelled much righteous anger on this blog fades into history. Anyone who has known me long enough will know that I argued vociferously against Brexit. The economic arguments did not stack up, and the political risks associated with a go-it-alone policy in a world in which the frontiers of globalisation were already receding were simply too high – as Donald Trump has demonstrated in spades. It should therefore come as no real surprise that many voters now appear to be experiencing buyer's remorse, with around 60% believing that Brexit was a mistake (chart above).

Much ado about politics

Much has changed in the past ten years, but the issues which drove the Brexit vote in the first place have, if anything, intensified. Economically, the UK is struggling. The productivity collapse in the wake of the GFC has not been addressed and as a result growth remains weak. Consequently, voters increasingly feel they have to run harder just to stand still. It should not be a surprise that they are seeking alternatives to a political system they feel is not working for them. Just as austerity fuelled resentment that was successfully channelled by populist movements in 2016, current economic frustrations are again creating fertile ground for anti-establishment politics. Those same actors who once promised that Brexit would deliver an economic transformation are now drawing on dissatisfaction with weak growth and stagnant living standards to sustain their electoral appeal.

The campaign and its aftermath eroded trust in politicians which shows no sign of being restored: between 2016 and 2019 the Conservatives argued amongst themselves about how to deliver Brexit; the Labour Party dithered on the sidelines and the Lib Dems adopted an unrealistic position that a second referendum was necessary to validate any deal (they were not necessarily wrong about that but it was politically naïve). None of those who advocated a policy which was clearly not in the national interest has ever been called to account. Boris Johnson even used the Brexit referendum as a stepping stone to achieving his ambition to become Prime Minister, although he proved as disastrous in that role as I expected. Of all those who campaigned long and loud for Brexit, only Nigel Farage remains in frontline politics, leading his third political party since 2016 as the latest incarnation of UKIP rides high in the polls.

Such is the power of populism that a sixth Prime Minister in the last 10 years has now left office, one through electoral defeat and the others under sustained political pressure (ironically the previous six Prime Ministers spanned 40 years). Keir Starmer is being punished as much as anything for lacking Farage's ability to connect with voters and communicate simple political messages. Admittedly, his government has been far too timid in tackling some of the problems faced by the UK and it failed in one of the key things I expected of it in 2024: “Making voters lives better is the one thing that will raise the chances of a second term in office – a second term that will undoubtedly be required to properly fix many of the things in the economy that require improvement.” But one thing we learned from the Brexit referendum is the power of style over substance. Voters want simple answers to complex problems very quickly and Starmer was honest enough not to promise that, even if he acted too slowly. Frankly, it is hard to believe that changing the Prime Minister is going to resolve problems that are rooted less in leadership than in the mismatch between complex economic realities and voters’ demands for simple, rapid solutions – particularly when politicians have little control over the underlying economic and institutional constraints that continue to shape outcomes.

A quick look at the economics

All of the empirical evidence points to output losses compared to what might have happened had the UK remained in the EU. A widely reported paper by Nick Bloom et al[1] (here) found that UK GDP was reduced by 6% to 8%. My own calculations, in joint work with my colleague Ben Caswell, based on synthetic control analysis came to a similar conclusion (here, see chart below) [2]. Clearly, there are big variations in the magnitude of the output loss – the OBR, for example, reckons with a 4% hit to GDP – but no evidence has been presented to suggest that the UK is better off.

Since Brexit was, in the words of Pascal Lamy, “the first negotiation in history where both parties started off with free trade and discussed what barriers to erect”, an assessment of the UK trade numbers is a good place to start. By Q1 2026, the volume of UK merchandise exports to the EU was 13.1% below 2019 levels. But the picture is not quite so simple: on my calculations[3] the collapse in merchandise volumes was offset by a surge in services exports, to leave total export volumes to the EU 0.8% higher than 2019 levels.

But just because UK exports to the EU are broadly flat does not mean that they have performed strongly. The relevant question is not whether exports to the EU are higher or lower than they were in 2019, but how they have performed relative to a plausible counterfactual. To put some flesh on these bones, total EU imports increased by 12.1% between 2019 and 2025, while world trade volumes increased by 14% over the same period compared with a rise in UK exports of 5.8%. Whichever way we look at it, UK export volumes appear to have underperformed. Indeed, Ben’s analysis suggests that the impact of non-tariff barriers is greater than that of tariff barriers themselves, due to factors such as rules-of-origin requirements and customs checks. On his calculations, these factors “reduced UK exports to the EU by around 5.7 per cent and imports from the EU by around 9.1 per cent relative to their pre-Brexit baseline”.

An additional channel is the impact on corporate decision making. Business uncertainty rose sharply after the referendum and only began to dissipate after the UK left the EU, by which time we were in the middle of the Covid pandemic. Businesses had no idea about the trading arrangements they were likely to face with the EU, and were forced to make contingency plans for eventualities that never materialised. All in all, our research suggests that “UK business investment is between 12-13 per cent lower than it otherwise would have been” in the absence of Brexit.

While the UK may be poorer than it might otherwise have been, it has not been the complete disaster that many feared. The labour market has held up reasonably well with unemployment remaining relatively low and the City of London still Europe’s preeminent financial centre. In fact, for most people life has continued as normal – for the most part people would not immediately notice any difference to pre-Brexit Britain. But Brexit has not resolved many of the issues that its proponents promised.

One of the biggest challenges has been immigration. Despite ending free movement from the EU, the UK economy continues to depend heavily on migrant labour in sectors where employers have struggled to recruit sufficient domestic workers, despite the introduction of a more restrictive immigration regime. Net migration fell sharply in 2025, to 171k from 331k in 2024 (chart above). Tighter visa rules reduced the inflow of workers, students and their dependants, while many of those who had arrived during the 2022-23 boom began to leave the UK. The tightening of rules for students is particularly bad news for universities which rely heavily on the fees paid by foreign students. Meanwhile politicians have struggled to stem the flow of immigrants illegally crossing the channel, an issue which has resonated with voters and given such a lift to the Reform Party.

What next?

As it currently stands, Brexit has not delivered on the promises that were made in 2016. Doubling down in the hope of doing Brexit “properly” is not the way forward. Closer ties to the EU are the solution, but negotiations with the EU will not prove easy. The closer the UK wants to move towards the EU, the more concessions the EU will demand, as Switzerland has found out in recent years.

Moreover, the EU has changed since the UK was last a member. It is a larger entity with a changed geography that has seen the geopolitical centre of gravity moving further east. Since 2016 the EU has become more openly a geopolitical actor following the Russian invasion of Ukraine, and is not just a regulatory and trade bloc. Post-Covid, fiscal integration has increased with the creation of NextGenerationEU, a large-scale common borrowing and recovery fund, which marks a shift toward shared fiscal capacity at the EU level. Even if re-entry were an option – which currently appears highly unlikely, not least because of the continuing strength of Eurosceptic sentiment in UK politics – it would involve significant reconvergence costs and transitional frictions rather than a simple reversal of Brexit. With businesses having adjusted to the post-Brexit environment, albeit reluctantly, they would be equally loath to incur a new set of additional costs.

Brexit is not solely responsible for the UK's economic difficulties, but closer ties to the EU might mitigate some of the more annoying bureaucratic issues. The country's underlying problems – weak productivity growth, low investment, skills shortages and a political culture increasingly drawn to simple solutions for complex challenges – pre-date the referendum and will persist regardless of its constitutional relationship with Europe. There are some things that the UK government can do which do not involve seeking closer integration with the EU – notably reform of the planning and welfare systems. But after a decade of debate, one conclusion seems difficult to avoid: Brexit has imposed economic costs while failing to address many of the concerns that drove the vote in the first place. The task now is not to refight the battles of 2016, but to find a pragmatic way forward that recognises both the realities of Brexit and the benefits of closer cooperation with our largest trading partner.

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[1] Nicholas Bloom, Philip Bunn, Paul Mizen, Pawel Smietanka, and Gregory Thwaites ‘The Economic Impact of Brexit,’ NBER Working Paper 34459 (2025), https://doi.org/10.3386/w34459

[2] Caswell, B and P Dixon (2026) ‘Brexit and the UK Economy Ten Years On: Stocktake and Future Options’, NIESR Policy Briefing

[3] Since the UK does not provide separate price deflators for EU and non-EU services trade, I simply deflated the nominal regional values by the aggregate services export price deflator.

The World Cup numbers game

Every four years, the World Cup sweeps across the globe, turning casual viewers into devoted fans and offering millions a brief respite from everyday worries (although for those enduring conflict in places such as Kyiv or Gaza, the tournament might feel very far away). Beneath the spectacle of the tournament lies a vast commercial enterprise, where global brands compete for attention and football's emotional appeal is transformed into economic value. Host countries justify the huge expense involved in staging the tournament by highlighting the economic benefits that will flow in return. I have never been convinced by this. But you don’t have to take my word for it: This article, by Professor Rob Wilson, makes all the points (and more) that I have been making over the last 20 or so years.

This year’s tournament, which is so big it will be hosted by three countries, feels overblown. FIFA has expanded the tournament to allow for 48 participants in the final stages, and while this undoubtedly makes the tournament more inclusive, it is somewhat incongruous that the likes of Curaçao and Qatar have made it through while four-time winners Italy have not. Although FIFA’s attempt to broaden the game’s global reach is laudable, Curaçao has a population of approximately 158,000 – Italy has 22 individual cities with larger populations. It is hard to make the case that a tournament is necessarily stronger or more compelling simply because it includes more teams. While the expansion offers opportunities to nations that would previously have had little realistic chance of qualification, it also raises questions about whether the quality of the competition has been diluted.

One consequence of this expansion is that the tournament will comprise 104 matches versus 64 in 2022. At least it is being held at a more usual time of year for this tournament, rather than just before Christmas, but while daytime temperatures may not quite match the highs recorded in Qatar in 2022, they are still very high. Moreover, there are justifiable concerns around the demands on top players – many of whom already face congested club schedules.

However, football is now big business. FIFA expects to earn around $13bn during this 2023-26 cycle – 72% more than the previous World Cup. According to Deloitte’s the world's 20 highest-earning clubs generated a record €11.2 billion in revenue in 2023/24 with Real Madrid becoming the first football club to generate more than €1 billion in annual revenue. Almost half (44%) of revenue generated by the top clubs is derived from commercial activities and sponsorships, with a further 38% derived from broadcasting. Just 18% comes from matchday income. Fans who pay to watch football on TV are actually more valuable to clubs than those who turn up at the stadium.

For all these commercial reservations, there is no doubt about the appeal of o jogo bonito. Despite the plethora of matches to wade through (I can assure you I will not be watching all of them) there is something uniquely compelling about a World Cup tournament. Perhaps we tune in because we hope for a classic tournament along the lines of Mexico 1970. Or maybe you hope your team will win (though if you are English or Scottish I would suggest not raising your hopes too much). Whatever the reason, many people who do not follow the game regularly might take more than a passing interest this summer.

Who might win: A statistical analysis

At the outset, I should declare that I have a notoriously bad track record of predicting the tournament winner. That has not stopped me from having another go at running a statistical model, largely because it is a fun programming exercise, and partly because every time I do it, each new version of the model is an improvement on what went before. Indeed, this year’s version – a fully coded Monte Carlo simulation exercise – is a long way from the spreadsheet models of 20 years ago.

The model simulates the entire 2026 FIFA World Cup, from the opening group fixtures all the way through to the final, running a virtual tournament 10,000 times. Rather than simply relying on team ratings, the model derives each team's attacking and defensive strength from recent historical data[1]. Expected goals are nudged up or down based on the difference in the ELO world rankings between the two sides. Scorelines are then generated using a negative binomial distribution, which better captures the over-dispersion and inherent unpredictability of football results than simpler alternatives. The probabilities of qualifying for the knockout stage of the tournament are shown in the table below (click to enlarge).

One thing to look out for are those cases where there are only small differences in probability between finishing second, and ensuring automatic qualification for the knockout stages, and finishing third, which will result in hoping to qualify as one of the 8 best third placed teams. For example, the simulated results for Group I point to little difference between Norway and Senegal, suggesting scope for an upset. There is also not much between first and second place qualifying slots in groups A, D, F, G and I. Group C also throws up a surprise with Morocco qualifying ahead of Brazil. I am not sure how much weight I would place on that but that is all to do with form over the last four years.

In line with the tournament rules, the top two teams from each group qualify automatically for the Round of 32. The remaining eight spots go to the best third-placed finishers across all 12 groups. FIFA has devised a complex matrix of outcomes to determine where the third placed teams are allocated in the draw, based on every possible combination of qualifying third-placed teams (all 495 of them) which I used to assign the opponents for the third placed teams. Matches level after 90 minutes were assumed to proceed to extra time, where scoring rates are reduced to reflect fatigue. If sides cannot be separated, penalties are decided by a weighted probability that gives a modest edge to the higher-ranked team, but with enough randomness built in to reflect the unpredictability of a shootout. The ultimate tournament outcomes are shown in the table below (click to enlarge).

As the table shows, the model outcome points to Spain as the tournament winner, by the very shortest of heads from Argentina. The bookmakers odds are considerably shorter than my estimate, offering 9-2 versus my estimated odds of 9-1. But the odds generated by the model are designed to sum to one – those offered by bookmakers are designed to maximise their chances of making money depending on the weight of bets placed (see here for an explanation). Two things stand out from the model generated results: first, Brazil is assigned a very low probability of winning, reflecting their relatively poor performance since 2003. Again, this may reflect the fact that their recent performance underestimates their true quality. Second, Japan look to be a good outside bet. Anyone who watched them beat England earlier this year will have noted that they are a very good team. As for England, I have them down as an 11% shot to reach the semi-finals but that is about as generous as I am prepared to be.

Statistically, of course, the odds are always against any individual team winning the tournament. Spain may be the favourites, but they still have roughly a 90% chance of not lifting the trophy. Should they fall short, I reserve the right to declare that the data vindicated me all along.

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[1] Previously I used a time-decayed average of goals scored in World Cup final tournaments. This time I have switched to a metric based on performance from 2023 onwards (i.e. since the last World Cup).

The long and the short: Part 2

Just after the first part of this note was published, the US and Iran negotiated a fragile ceasefire which appeared to involve the reopening of the Hormuz Strait. Donald Trump and his acolytes attributed this to his threat that “a whole civilisation will die tonight” unless the waterway was reopened. Iran, for its part, insisted it had successfully resisted the military pressure brought to bear on it. Indeed, the Strait remains closed – an Iranian demonstration of how it still holds a lot of the cards.

In truth, there are no real winners. Iran has taken heavy punishment from US and Israeli attacks which have degraded a considerable part of its military capacity and resulted in thousands of civilian casualties. But the US may have lost something even more important – credibility. It cannot claim to have achieved its initial goals of regime change and elimination of the Iranian nuclear programme (despite claims that the programme was ‘obliterated’ in 2025). The Iranian government remains in place even after the assassination of Supreme Leader Khamenei; it retains the ability to launch missiles against its neighbours and it still possesses its stock of enriched uranium. Moreover, Iran has now exerted control over the Strait of Hormuz, a waterway where it once merely harassed shipping but where it now dictates the terms of passage for the 20% of global oil traffic that flows through it.

History suggests that previous episodes of Western involvement in the Middle East have exacerbated rather than improved local security conditions. Recent cases have included the 2001 invasion of Afghanistan and the 2003 invasion of Iraq which precipitated acute sectarian polarisation and a near-disintegration of Iraq’s social fabric. Nothing that has happened in recent weeks suggests that the cycle will be broken this time around. Indeed, events since 7 October 2023 have ratcheted up global tensions in a way not seen since the Yom Kippur war of 1973. Israel’s actions alone have represented a disproportionate use of military force but US strikes against Iran represent an even more consequential strategic miscalculation, with the potential for far‑reaching geopolitical repercussions.

1. US actions will have more adverse geopolitical consequences than previous episodes

The litany of miscalculation and bombast on the part of the US Administration needs no repetition here but it is having profound consequences which could lead to a change in the geopolitical order. Although it made less strident claims during the Vietnam War, the US made a similar geopolitical miscalculation in the 1960s when launching its military power against a supposedly weaker opponent. But it was able to recover from that episode by virtue of being the unchallenged global economic leader. While the war placed fiscal and social strains on the US, the underlying economic engine was so powerful that recovery was almost structurally guaranteed. Along with this economic dominance, the US retained its position as the leader of the western alliance. Today, the size of China’s economy means it is now a near‑peer economic rival, while India and the EU represent sizeable economies that dilute US dominance. Trump’s erratic foreign policy means that erstwhile allies no longer have the same degree of trust in the US, whose leadership of the western alliance has been severely strained.

2.   The western alliance has experienced a profound change

None of this is to say that the US will not remain the strongest western power, both economically and politically. A post‑Trump administration may well re‑anchor US foreign policy in its traditional liberal democratic values, leading to a renewed warmth in transatlantic relations. But as the journalist Lewis Goodall recently noted, the widening gulf between Europe and the US MAGA movement is increasingly about values and “the divide runs deeper than policy, deeper than politics, deeper than any single leader can bridge.”

Trump’s recent threats to pull out of NATO would certainly undermine European security guarantees. But it would also reduce US ability to project its power around the globe. At the same time, efforts to draw European partners into the Middle East war and Trump’s ambitions towards Greenland have reminded Europe that partnership is not the same as dependence, and that it cannot afford to outsource its interests. It now understands the limits of external guarantees and the need to take fuller responsibility for its own security and economic resilience.

This will, of course, have serious military and economic implications for both Europe and the US. In 2023 and 2024, more than half of non-US NATO military spending went to US-owned companies, so the US stands to lose economically if Europe reduces its dependency. But Europe is also heavily dependent on the technology embedded in US-produced military equipment which will not be easy to replace (for a fuller discussion of these issues, see this excellent piece from the Bruegel think tank). The western alliance has served all sides well over the last 80 years. Its demise would not benefit any of its members.

3.   Trump has played into China’s hands

Large parts of the Middle East, particularly the Gulf states, have traditionally adopted a pro-US stance, relying on it for protection from hostile actors. But Iran’s missile attacks on Gulf states which host US military facilities have raised questions about just how much protection the US is able and willing to give. This raises the incentive for them to be more amenable to Chinese overtures as China seeks to expand its sphere of influence.

In East Asia, questions have been raised around China’s ambitions towards Taiwan and how far the US would be prepared to go to defend it. It is notable that Cheng Li-wun, the chair of Taiwan’s Kuomintang (KMT), this week met with Xi Jinping in Beijing, the first such contact in a decade. While there is no suggestion that the People’s Republic is planning a military invasion, Chinese military planners will undoubtedly have taken on board just how quickly the US is prepared to expend resources in pursuit of its goals, and how Iran has been able to absorb the military onslaught against it. Indeed, one of Trump’s biggest blunders has been to expose the limits of military power when confronted by a determined adversary. Deterrence is strongest when overwhelming force is implied, not when it must be used, particularly when it does not actually achieve its goals.

4.   Acceleration of global fragmentation

Historians may look back at the events of March 2026 and conclude that this was the point at which the position of the US at the top of the global geopolitical order became less certain. China has been able to sit on the sidelines and watch the US alienate its allies. One outcome might be a reduction in reliance on the US for security and a greater willingness to explore trade and financial payments infrastructure based on anchors other than the dollar. It is important to emphasise that this will not happen overnight – there will be no sudden rupture – but it could result in a gradual erosion of US dominance as parallel networks gain traction at the margin. This risks a more fragmented global landscape characterised by competing spheres of influence, reduced policy coordination and a diminished capacity to collectively manage cross-border shocks.

5.   Rising tail risks

One cause for concern is that there will be a significant widening in the distribution of risks. A global environment which has been built on a system of deterrence and sharply delineated red lines is increasingly subject to ambiguity. This increases scope for miscalculation by multiple actors operating in close proximity which in turn raises the likelihood of low-probability, high-impact events, ranging from unintended military escalation to a more sustained disruption of critical chokepoints (as we are seeing in the Strait of Hormuz today, but this could equally be a disruption of computer chip supply or some other critical material). In this environment, these risks are not independent: an initial shock could trigger a cascade of responses, amplifying its impact well beyond the original incident. The result is a more unstable equilibrium in which periods of apparent calm mask an underlying increase in systemic vulnerability, and where geopolitical developments are more likely to generate abrupt and non-linear shifts in the global landscape.

Last word

Some, all or none of the above risks could materialise. It may be that the Trump era represents a temporary blip in the global order and that the west will settle on a stable equilibrium once he leaves office. But it would be complacent to assume a return to the old normality. Something has fundamentally changed: the certainties of the old global order have given way to a more volatile and fragmented system, where stability can no longer be assumed and where shocks, whether geopolitical or economic, are likely to be both more frequent and more disruptive. And this is likely to have economic costs as European countries make greater provision for defence spending, diverting resources away from more productive investment and placing additional strain on already stretched public finances. A more fragmented and less predictable global environment will weigh on trade, investment and policy coordination, reinforcing the drag on growth. The cumulative effect is a world economy that is not only more exposed to shocks, but less well equipped to absorb them.

The long and the short: Part 1

As the US-Israeli war against Iran drags into its sixth week, the repercussions will be far-reaching. In the near-term, these are likely to be primarily economic. In the longer-term, the geopolitical ramifications will be more profound as the global order experiences what appears likely to be a permanent rupture. In the first part of a two-part note, I take a look at the economic aspects – drawing on an interactive VAR simulation dashboard to map the transmission of shocks – while the second part (forthcoming) will deal with the geopolitical consequences.

The magnitude of the problem

IEA Executive Director Fatih Birol, recently warned that “we are heading towards a major, major disruption, and the biggest in history.” It is almost certain that market conditions will get worse before they get better. Oil supply in March was partially supported by cargoes that had already passed through the Strait of Hormuz before hostilities escalated, and oil prices are already up 50% compared to pre-hostilities levels. If current estimates are correct that disruptions amount to 12 million barrels per day, this would amount to a 12% cut in global crude supply on an annual basis, compared to reductions of less than 5% in the 1970s. To put that into context, oil prices tripled – both in real and nominal terms – in 1974.

In an ironic twist, the 1970s oil shock was prompted by unconditional US support for Israel during the Yom Kippur war, which angered other Arab States so much that they imposed an oil export embargo. This led to increased tension between the US and several of its European allies who privately criticised the US for its reckless policy actions. US Secretary of State Henry Kissinger later admitted: “I made a mistake. In retrospect it was not the best considered decision we made.” It is unlikely that Donald Trump would ever make such an admission.

That was then. In many ways the world is very different. For one thing, although global oil consumption has doubled since the 1970s, European consumption in terms of barrels per day has remained broadly flat whereas Asian demand has increased fourfold, resulting in a big decline in consumption share for the former and a big rise for the latter (chart above). This is partly a reflection of European deindustrialisation whereby Europe now imports a lot of the manufactured products from Asia that previously would have been produced domestically. This has a double-edged effect: Asia will likely be much harder hit by the recent surge in oil prices than it was in the 1970s, while Europe will still end up importing inflation. Nor is the story these days purely about oil. Natural gas is increasingly used as a form of power generation, with global consumption having increased by 3.5x since the 1970s while European demand is up by 2.5x. So far, natural gas prices have not spiked to the same degree as they did in 2022: The Daily System Average Price (SAP) of Gas in the UK, which is an important determinant of retail prices, is admittedly up by 80% since end-February, but at 4.73p/kWh it is well below levels in excess of 19p/kWh in summer 2022. That said, matters might look different in a few months if energy does not start flowing through the Straits of Hormuz soon.

As it is, the pump price of petrol has risen sharply. US prices are now around $4/gallon, still 20% below the highs of summer 2022, but not a prospect that will endear President Trump to voters ahead of the mid-terms due in November (charts below). Similar trends are evident in the UK with a price around £1.54 per litre still 20% below 2022 highs (though at £5.83 per US gallon, or $7.59 at current exchange rates, UK motorists pay a lot more to fill up their cars). The price of petrol will feed through quickly into inflation. A rough rule of thumb is that every 5p on the fuel price adds 0.1pp to UK inflation, so on the basis of mid-March prices that will add 0.2pp to last month’s inflation rate. Latest data point to another 0.3pp in April. In the absence of energy effects, we could have expected UK April inflation to fall to the BoE’s 2% target rate as a number of base effects drop out of the calculations. On my calculations, that now looks unlikely.

Back in 2022, the huge surge in global prices triggered big increases in domestic energy bills. In the UK, domestic gas prices rose by 130% in 2022 though they are currently 35% below those peaks. In the short-term, consumers will be sheltered by the quarterly fixing of the household energy cap in April which means that any rise in domestic prices will only start to feed through from July. The econometric evidence suggests that it takes around 6 months for the full impact of global prices to feed through to UK consumers, which means we can expect significant increases in household energy bills in the latter part of 2026. On my calculations, the increase is likely to be at least 50% by end-year – and probably higher.

How do policymakers respond?

Even if we assume that the war ends tomorrow, the supply disruptions will take months to unwind, and it could take until end-year before supply is back to normal. But this optimistic scenario is one of the least likely options given the rhetoric out of Washington and Tehran in recent days. To frame the scale of the challenge facing policymakers, I have built an interactive VAR simulation dashboard (here) that allows users to explore how oil shocks and related variables propagate through the US, UK and euro area economies. It is not intended as a forecasting tool, but it provides a clear, model‑based sense of the pressures policymakers – particularly central banks – will have to weigh as they confront the next phase of this crisis[1].

The most obvious question is whether central banks should respond to inflationary shocks by tightening policy. In 2022, central banks responded to higher oil prices by raising interest rates. In one sense they could afford to do this because at the time of the Russian invasion of Ukraine, interest rates were at their effective lower bound. There was, in short, scope to tighten policy. Interest rates today are much closer to neutral. The extent to which rates should rise thus depends upon the extent to which second round effects are likely to impact the economy. In the US, the degree of labour market slack as measured by the unemployment rate is only modestly higher now than in early 2022. But in the UK the unemployment rate currently stands at 5.3% and rising, versus 3.9% and falling in early-2022. The number of  unfilled vacancies in the UK has fallen, suggesting softening demand for labour. All told, the risk of second round effects might be smaller than four years ago. The simulation model suggests that a sustained 50% rise in oil prices will add around one percentage point to UK inflation, and raise the risk of a modest 25bps increase in interest rates (50bps if we use the regime switching option). The ECB would be expected to respond with a 50bps rate hike whereas the Fed may even respond by cutting rates (charts below).

The other question is whether governments will be able to afford to use fiscal means to cushion households against rising energy bills in the way they did in 2022. In the UK, the net cost of support measures was roughly 2% of GDP in fiscal 2022-23. Hopefully the spike in the household energy price cap will be nowhere near as big as four years ago. Even so, a government which has set out its stall to balance the fiscal current account by the end of the decade will have precious little scope to provide any form of support. Indeed, as a senior British lawmaker put it to me recently, there is a question of whether governments should be providing such levels of support at all.

Last word

We can debate the pros and cons of Trump’s war (let us call it for what it is) but the economic consequences are unavoidable. A supply shock of this scale cannot be insulated by monetary policy or fiscal transfers. It will impact on prices and is likely then to affect wages and public finances, testing the political and economic cohesion of the global economy. The uncomfortable reality is that the costs will fall disproportionately on households and regions that had no role in shaping the decisions that triggered the crisis. The extent to which electorates are willing to absorb those costs is one that policymakers can no longer ignore.

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[1] The model includes GDP, CPI, the central bank policy rate and the trade weighted exchange rate (UK and euro zone)/unemployment rate (US). Users can simulate the impact of oil price changes; change the number of periods over which the disruption lasts; the pace of return back to baseline; the forecast horizon and whether they wish to operate in a low or high price regime. Separately, users can simulate the effects of changing endogenous variables with oil prices fixed. Please note that this is a work in progress. See the webpage for more detail.

100 Not Out

To reach the age of 100 is a significant event for anyone. When the centurion in question is the man (formerly) known as Maestro, one of the most significant central bankers of modern times, it is surprising that more was not made of the fact that Alan Greenspan celebrated his 100^th birthday on 6 March. Admittedly he has been out of the limelight for the past two decades, and his reputation was tarnished by the GFC which was widely blamed on his laissez-faire approach in the decade prior to 2008. But his hold over markets during his two decades as Fed Chair was unprecedented and he made a number of policy contributions that remain relevant today.

Such was his stature that during a presidential debate in 2000 when John McCain was asked whether he would reappoint Greenspan if he were elected president, McCain quipped: “Not only would I reappoint him, but if he died we’d prop him up and put sunglasses on him as they did in the movie Weekend at Bernie’s.” Contrast that with the remarks made by President Trump about outgoing Fed Chair Jay Powell to understand the radical shift in the respect shown to those in public office and the institutions they lead.

Assessing the legacy and the key takeaways for today

For someone who sat atop the Fed for so long, and who presided over so many important events in financial history, he obviously got a lot of things right, though we should not gloss over his mistakes. His first test as Chair came on 19 October 1987 – just two months into his tenure – when the market crash which came to be known as Black Monday precipitated the first market rout of the modern globalised era. Greenspan calmed markets with a 30-word statement: “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirms today its readiness to serve as a source of liquidity to support the economic and financial system.” It worked and thus the legend of the Greenspan put was born. The combination of interest rate cuts and repos was subsequently deployed during the Mexican peso crisis of 1994-95, and again in the wake of the 1997 Asian financial crisis which prompted the 1998 collapse of Long-Term Capital Management. Following the bursting of the dot-com bubble in 2001 the Fed was at it again, preventing a major market correction from dragging the economy into a more serious recession.

By the late-1990s, Greenspan was hailed as the Maestro who would always be there to provide support to financial markets. But it bred complacency by creating a climate of moral hazard. The phrase “Don’t Fight the Fed”, coined by the investor Martin Zweig in 1970, became closely associated with the actions of the Fed under Greenspan. Wall Street loved Greenspan for a reason – his policies helped banks generate sizeable profits and made rock stars of those bankers and analysts who were able to ride the wave. But after hubris came nemesis. Greenspan’s light touch was at least partially responsible for the build-up of off-balance sheet debt which was the primary cause of the 2008 market collapse. Working in markets around the turn of the century, I was always cautious of going overboard in praising Greenspan’s achievements. Looking back through some of my old writings, I came across this from August 2002: “It is always wise to be wary of the reputations which the markets create for certain individuals (viz. Mr Greenspan as history may yet pass a different judgement on the conduct of Fed policy during the 1990s boom).”

Greenspan’s tenure coincided with a period of growing economic imbalances. The greatest boom and bust on his watch was the equity boom of the late-1990s and while he vehemently denied that the Fed could have done much to stem the boom, arguing that bubbles are only evident in hindsight, it was obvious to many that the equity market would pop at some point. Greenspan fuelled the flames of the tech bubble by extolling the virtues of new technology and talking up the productivity revolution that they appeared to have triggered.

Yet for all the criticisms, it would be churlish to deny that the actions of the Fed in 1987, 1998 and 2001 to pump liquidity into the US economy prevented a much more serious global downturn than might otherwise have occurred. Nor should Greenspan’s role in advancing the cause of central bank transparency be underplayed. Prior to 1994 the FOMC did not even communicate to markets at what level it set the funds rate – this had to be inferred from market actions by the New York Fed. In addition, the Fed was a leader in publishing the minutes of policy meetings, which considerably improved policy transparency. A return to the pre-1994 world is almost unthinkable today. For all the modern talk of central banks providing forward guidance, it was Greenspan’s Fed which helped write the template, even if his Delphic utterances could be difficult to translate (as he once half-jokingly told Congress in 1987: “If I seem unduly clear to you, you must have misunderstood what I said.”)

While Greenspan’s free market leanings placed too much faith in the ability of financial markets to regulate themselves, we did at least learn much from the mistakes of the Greenspan era. In the rational world of science, in which he placed much faith, that would be regarded as progress. We should also give him credit for not taking received wisdom at face value. His belief that the US economy’s growth rate was faster than implied by the prevailing view of the NAIRU (5% at the time) meant that Greenspan resisted pressure to raise rates aggressively, and the Fed thus allowed the US economic upswing to continue for longer than traditional models suggested was safe. Data subsequently showed that an acceleration in productivity growth suggested he was right – the economy’s speed limit had increased.

An important takeaway for modern day policymakers is that they should pay close attention to the supply side of the economy, particularly the economy’s potential growth rate and the neutral rate (r*). At a time when AI threatens to upend many of our beliefs about the economy’s productive potential, an understanding of the economy’s growth potential is more important than ever. As in the late-1990s, policymakers may again be forced to decide whether apparently unsustainable growth reflects excess demand or a genuine shift in the economy’s productive capacity.

Last word

Greenspan’s tenure as Fed Chair produced a number of paradoxes. The crisis management playbook, which he helped pioneer, remains the template for modern central banking. Yet his hands-off approach to regulation was instrumental in ushering in a period of tighter financial regulation. He communicated frequently with markets, although they did not always understand the message he was trying to convey. He was the most important public official of his day, yet we never really knew his beliefs on many issues until long after he retired. Nonetheless, it is testimony to his importance that his legacy is still debated and that the legacy of the 1990s revolution in central banking continues to echo. Happy 100^th birthday Mr Greenspan.

Deindustrialisation: The rights and wrongs

Marco Rubio’s speech at the Munich Security Conference last weekend was greeted with relief in some quarters for being less bombastic than JD Vance’s aggressive speech in 2025. But in many ways, the underlying message was the same and it did nothing to dissuade the audience that the United States and Europe have fundamentally different geopolitical views and interests. Nonetheless, the speech was interesting and contained some points I agreed with, many that I disagreed with, and one in particular that touched on an economic issue worthy of further thought.

Was deindustrialisation inevitable?

Rubio opined that “Deindustrialization was not inevitable.  It was a conscious policy choice, a decades-long economic undertaking that stripped our nations of their wealth, of their productive capacity, and of their independence.  And the loss of our supply chain sovereignty was not a function of a prosperous and healthy system of global trade.  It was foolish.  It was a foolish but voluntary transformation of our economy that left us dependent on others for our needs and dangerously vulnerable to crisis.”

In my view, the idea that “deindustrialization was not inevitable” is both right and wrong. In order to unpack this, we should recall that the prevailing economic model across the Anglo-Saxon world from the 1980s onwards was heavily influenced by the ideas of Milton Friedman and the Chicago School. They strongly argued that markets allocate resources more efficiently than governments, and that shareholder primacy and capital mobility were normal features of a globalising economy. In order to make this model work, financial markets were deregulated and capital markets became increasingly global in scope. Firms came under strong pressure to relocate production to lower-cost jurisdictions, automate labour-intensive processes and shed capacity that no longer met required rates of return.

Trade barriers were lowered, partly through the completion of the EU single market, but most importantly as a result of China’s accession to the WTO in 2001. And who was the prime advocate of that accession? None other than the United States. However, the result was that in a world of falling trade barriers and increasingly rapid technological change, maintaining high-cost domestic manufacturing often meant either accepting lower profitability or subsidising inefficiency. Detroit’s decline was not wholly due to the inexorable rise of Shiyan – it was aided and abetted by government policy.

But while deindustrialisation was a consequence of governmental decisions, voters also expressed a clear preference for this model. Resources were reallocated towards sectors in which advanced economies enjoyed a comparative advantage – finance, high-value services, technology and knowledge-intensive activities – while production was outsourced to regions which enjoyed lower costs. As a result, consumers benefited from lower-priced goods. After the inflationary turmoil of the 1970s, voters supported policies that prioritised price stability, efficiency and consumer welfare. To that extent, the economic settlement reflected societal preferences as well as political ideology. It was as much a reflection of societal choice as a policy imposed by governments.

We are paying a price

Unfortunately, the gains from a relatively laissez faire policy were unevenly distributed. Indeed, many of us have long argued that the pace at which large parts of the western world deindustrialised, particularly the UK, was always going to create the left-behind communities that politicians now struggle to engage with. Labour was far less mobile than capital, with the result that workers in former industrial regions could not simply retrain overnight or relocate at negligible cost. Skills were industry-specific; social networks were geographically rooted and housing markets were illiquid. What appeared as efficient reallocation in the macro numbers manifested locally as long-term unemployment, wage stagnation, deteriorating public services and social fragmentation.

Although the economic orthodoxy of the time assumed that the operation of market forces would generate new opportunities which would ultimately absorb displaced labour, the duration of the adjustment process was underestimated. In short, while deindustrialisation was perceived as economically rational, it was never economically costless. Perhaps the real problem was the absence of subsequent government engagement. Communities were told that there was nothing that governments could do to prevent the forces of globalisation ripping old industries apart and that they would have to reinvent themselves or face the consequences. Some of the old industries were admittedly unsustainable – coal mining for one – but governments could have done more to cushion the blow for other industries. In the UK, the government blew the windfall gains from oil revenues on tax cuts, rather than building a fund that could have provided support to those communities disadvantaged by the switch from coal to oil.

Thus, while countries such as Norway used resource windfalls to build long-term stabilisation mechanisms, the UK opted for rapid liberalisation with comparatively limited regional industrial policy. A similar position was adopted in the US. Successive governments ignored the fact that while many of the structural forces driving deindustrialisation were powerful and perhaps unavoidable to some degree, they gave little thought as to how society should manage the transition. This, in my view, is why you can debate Rubio’s position from both sides. Deindustrialisation can be seen as a response to the turmoil of the 1970s. We could have struggled on, supporting old industries in a stagnant economy. But the good times of the late-1980s and 1990s would not have happened, and China would have industrialised anyway. Or governments could attempt to fix things – which they did, albeit imperfectly.

Deindustrialisation and parallels with the AI revolution

Advances in AI threaten to unleash even more economic turmoil, for which governments around the world are woefully unprepared. If this popular essay is any guide, the AI models available today are “unrecognizable from what existed even six months ago ... ” and they are coming for your job. This excellent paper by Charles Jones (well worth a read) argues that “AI will likely be the most important technology we have ever developed” and poses the question “What if machines … can perform every task a human can do but more cheaply?” The object here is not to debate what AI can do, nor whether it will replace human labour (we can deal with that issue another time). The more immediate point is that transformative technologies have the power to reshape economies and societies at extraordinary speed. If the risks appear large enough, perhaps we should be trying to pause or even halt the process. But is that remotely feasible? Can you imagine the political backlash from figures such as Rubio if governments were to act in such a way?

The deeper issue is not whether we should stop AI, but whether we could. Once a technology offers clear economic, strategic or military advantages, it acquires a momentum of its own. No major economy can afford to fall behind; no government wishes to explain why it chose restraint while rivals accelerated. In that sense, technological change is not always a policy choice. It can become a structural inevitability. Deindustrialisation in advanced economies forty years ago followed just such a path. It was politically contentious and socially painful, yet in a world of global competition and mobile capital it proved effectively irreversible. AI may represent a similar moment. The real danger lies not in the technology itself but in the illusion that it can be switched off. The task for policymakers is not prevention, but preparation because history suggests that once transformation begins, it rarely asks permission.

Last word

Precisely because the combination of technology and politics is a process rather than a discrete choice, Rubio is wrong to suggest that deindustrialisation was simply a matter of political will. It represented the cumulative consequence of a policy regime that prioritised capital mobility, trade liberalisation and financial integration. It is true that governments could have done more to mitigate the costs, but once advanced economies committed to that path the industrial base adjusted accordingly. At that point, reversal would have required costs and disruptions far greater than those incurred by continuation. What began as a series of policy choices hardened into economic structure.

AI may follow the same trajectory. Early regulatory decisions matter, but once firms – and indeed wider society – reorganise production around algorithmic systems and autonomous capabilities become embedded, restraint becomes extraordinarily costly. The question is not whether policymakers approve of the direction of travel, but whether they are prepared for its consequences. As of now, they are not. It is important to be aware of this because, when future politicians tell us of the mistakes our society made, we should remember that many of the choices made were not ours to take.

2026: TrAIumphalism

If 2025 was the year when artificial intelligence escaped the laboratory and Donald Trump escaped political gravity, 2026 will see the consequences of these events play out further on the global stage. It will be another year dominated by political and policy uncertainty, with cyclical economic considerations likely to take a backseat as policymakers grapple with changing geopolitical circumstances. That said, worries of a bursting of the AI bubble will keep policymakers on their toes, as markets party like it was 1999. However, the crucial difference between today and the dawn of the millennium is that we are no longer basking in the glow of the peace dividend that formed the backdrop to the economic environment of the time. Consumers are anxious; governments are heavily indebted and policy choices are more constrained. Buckle up for another trip around the sun.

Rampant Trumpism

Trade policy dominated the first half of 2025 as President Trump followed through on his threat to use tariffs as a means of extracting concessions from trading partners. By September 2025, the average effective US import tariff rate stood at 10.65%, up from 2.2% in January. Analysis conducted by UPenn Wharton suggests that tariff rate changes generated $124.5 bn in net customs revenue in the first nine months of 2025, while importer shifts in purchasing behaviour reduced potential revenue by only $31.5 bn. In other words, they achieved the goal of revenue generation without derailing the economy, which may embolden Trump to further weaponize trade. But the longer-term effects have yet to feed through. Consumers do not like paying higher prices while the full impacts on growth and inflation have yet to be felt. Bottom line: We can expect to hear more on Trump and tariffs in 2026.

Meanwhile, Jay Powell’s term as Fed Chair will end in May. Concerns that his successor will be more willing to accede to Trump’s demands for looser monetary policy in order to boost growth has the potential to undermine Fed independence. Markets will be keeping a close eye on this issue.

But it is in the realm of geopolitics where Trump will have the biggest influence. In 2024 he promised that “when I’m back in the White House, we will expel the warmongers, the profiteers … and we will restore world peace.” Admittedly, he did enforce a deal in the Middle East in 2025, but this is honoured more in the breach, and he has had no impact on ending the war in Ukraine, despite promising in June 2024 that “I will have that war settled between Putin and Zelenskyy as president-elect before I take office.” Indeed, Trump’s casual disregard for Russian activities close to NATO’s borders (and sometimes inside them) has undermined trust in US willingness to guarantee European security. US military strikes against Iran and Nigeria demonstrate that Trump is not shy about projecting force. But the January 2026 action to overthrow Venezuelan president Maduro, with Trump promising to run the country “until such time as we can do a safe, proper and judicious transition” has raised question marks around whether his foreign policy is ultimately guided by a coherent vision of peace or by transactional calculations that vary from case to case. The result is not disengagement, but an erratic form of activism that has left allies uncertain, adversaries emboldened and global risks harder to price.

As The Economist noted at the end of 2025, the main beneficiary of Trump’s bombast is China. It resisted US tariff pressure, exposing how dependent America and its allies remain on Chinese manufacturing value chains. Moreover, Trump’s strategy has often played into China’s hands. Bilateral tariffs alienated allies rather than building a coordinated response, while attacks on science funding, immigration and foreign researchers will ultimately weaken America’s innovative edge.

The 2026 Midterms may act as a check on Trump’s ambitions. The smart money suggests that the House of Representatives is likely to come under Democratic control following next November’s elections, with the result that a divided Congress will mount some serious opposition to his plans. History is on the Democrats’ side: Only twice in 14 Midterms since 1970 has the House majority aligned with the President’s party. In addition, Trump’s net approval ratings are in negative territory, though admittedly by less than at this point during his first term (although his approval rating has dropped faster, albeit from a higher starting point in 2025). But it would be unwise to fall back on historical patterns to justify betting against him – after all, this is a President who revels in tearing up the rulebook.

AI caramba

Progress in AI will continue to dominate the economic conversation. The most pressing concern for policymakers is the prospect that the AI bubble will burst, dragging down markets in its wake, in much the same way as happened in 2001 following the deflation of the tech bubble. This is a valid concern: Market concentration is high, with the Magnificent 7 accounting for 34% of the S&P500 market cap. Market valuations also look exceptionally toppy, with Robert Shiller’s CAPE measure estimated to have reached 39.4x in December – a value exceeded only in 1999-2000 on data back to 1881. Indeed, the OBR was so concerned about the prospect of spillover effects from a global equity price correction that the November EFO included a scenario in which a 35% decline in equity prices was estimated to produce a 0.6% reduction in UK GDP in 2027-28. It is not only the financial markets which are increasingly AI dependent: In the first half of 2025, business investment in information processing equipment accounted for the bulk of US GDP growth. Any reversal of the AI boom could have significant impacts on the real economy.

While caution is warranted, there are significant differences to the 1999-2000 boom. The current AI cycle is driven by profitable, cash-rich companies which are experiencing robust demand for their products. Admittedly, expectations have outstripped earnings growth as investors engage in a process of price discovery in a wholly new environment, so some wobbles are likely along the way. But there is real demand for the products emerging from the latest AI revolution, backed by an emerging infrastructure. A key trend in 2026 will be the continued shift from experimentation to integration as corporates begin to embed generative AI tools more deeply into core business processes. This will drive productivity gains, although these are likely to be uneven and manifest in ways that are hard to measure in conventional statistics. As with past general-purpose technologies, the biggest effects will come not from flashy applications but from mundane process redesign: faster coding cycles, cheaper discovery processes and increasingly automated customer support functions.

This may add to social tensions as large companies with data, capital and managerial capacity pull further ahead, while smaller firms struggle to keep up. There are increasing concerns that graduate entry level jobs will feel the AI squeeze as white-collar occupations once thought relatively insulated from automation become vulnerable to the application of new technology. The political significance of this phenomenon will increase in 2026, especially as it collides with an already febrile debate about inequality, immigration and cultural change. We see these concerns manifested in the rise of political populism across Europe and the US. 2026 will likely see further declines in the popularity of centrist politicians (Emmanuel Macron and Keir Starmer to name but two) as they struggle to manage the fallout from these competing forces and deliver a return of the feelgood factor that they have long promised their electorates.

Other things to watch

In the absence of any shocks, there are few things to get excited about on the macro front although fiscal policy across the industrialised world remains an area to watch. In the US, Trump’s bias towards tax cuts balanced with (theoretical) spending restraint may start to put some strain on Treasury markets, especially if the new Fed Chair is perceived as soft on inflation. Across the wider world, high debt levels and interest rates which are considerably higher than four years ago will limit government’s room for fiscal manoeuvre. Markets are unlikely to be prepared to fund unlimited borrowing, while voters are not willing to pay higher taxes. This can has been kicked down the road for so long that it is one that most people ignore. We may do so at our peril.

Geopolitically, the world remains unsettled. The risk in 2026 is less of sudden escalation than of chronic instability as conflicts drag on, diplomatic frameworks weaken and international institutions struggle to command authority. For businesses and investors, the defining challenge of 2026 will be navigating a world where technological acceleration coincides with political friction. Scenario planning will become a core managerial skill as businesses will have to adjust rapidly to changing economic and geopolitical currents.

Clearly, 2026 will not be a year of calm. It will be a year in which the forces unleashed in the first half of the decade take firmer shape as we take another step along a road increasingly less framed by the post-1945 settlement. Never was Yogi Berra’s aphorism more apt: “The future ain't what it used to be.”