Brexit economy: UK faces slowdown amid living standards squeeze – The Guardian
One year since voters narrowly opted for Brexit, the Guardian’s monthly tracker of economic news paints a gloomy picture, with households facing rising costs and firms fretting over falling demand and political uncertainty.
The economy has so far avoided the recession predicted by some doomsayers at the time of the referendum, and in the months immediately following the Brexit vote the UK outperformed most other advanced economies.
As the pound’s sharp drop since the referendum works its way through the economy into higher prices in the shops, the pressures on consumer spending threaten to keep growth in the doldrums. Now that complex Brexit talks are gettting under way, business groups are also warning of headwinds from fraught domestic politics and uncertainty around the UK’s future trading and immigration arrangements.
To gauge the impact of the Brexit vote on a monthly basis, the Guardian has been tracking eight economic indicators, along with the value of the pound and the performance of the stock market.
The dashboard for June shows retail sales have dropped, inflation is at a four-year high, wage growth has slowed and the housing market is losing momentum (pdf). The pound has weakened again after Theresa May’s election gamble backfired and she failed to secure a majority in parliament.
But unemployment remains at a 42-year low, a drop in imports has narrowed Britain’s trade deficit and renewed weakness for the pound has boosted the FTSE 100 by flattering the performance of companies that operate overseas and report their earnings in dollars. The deficit on the public finances narrowed in May but it is expected to widen this year as Philip Hammond grapples with spending demands in the wake of the election shock.
Compared with economists’ forecasts, there was a worse than expected performance in four of the eight categories. Two were as expected and one – the trade deficit – was better. Inflation was higher than commentators had been expecting.
Writing in the Guardian, the former Bank of England policymaker Andrew Sentance said the squeeze on consumers was being reflected in weaker retail sales.
“Brexit discussions have started this week, but the impact of the EU referendum result on most households in the UK has been to squeeze both their incomes and spending,” said Sentance, a senior economic adviser at PricewaterhouseCoopers.
“Employment growth continues to be quite robust, however, so that offers a countervailing positive influence on the prospects for consumer spending.”
The squeeze on consumers was clear in a poll of services firms – the biggest part of the UK economy. The construction and manufacturing sectors beat City economists’ forecasts last month, according to the Markit/CIPS purchasing managers’ indices (PMIs). But the services industry disappointed, losing momentum as firms cited a drop in demand.
Sofa chain DFS became the latest business to complain of tough trading conditions last week when it blamed a sharp drop in orders on the upheaval created by the general election as well as the general air of uncertainty hanging over the economy.
Other firms say they have been hit by the loss of key workers, as staff from other parts of the EU return home ahead of a potential clampdown on immigration. Surveys suggest vacancies were getting harder to fill with one poll by the Recruitment and Employment Confederation flagging skills shortages across a range of more than 60 roles. Other figures showed a 96% drop in the number of nurses from the EU registering to work in the UK since the referendum.
For individuals, the clearest economic impact of the vote so far has been higher prices, stemming from the pound’s sharp fall against other currencies. The UK imports almost half of its food from overseas and a weaker pound raises the price of those imports and the cost of all the raw materials bought in by manufacturers.
Those higher import costs and the rise in global oil prices have been gradually passed on to consumers.
Inflation, as measured on the consumer prices index (CPI), hit 2.9% in May, well above the Bank of England’s 2.0% target. It marks a rude awakening for households after virtually no inflation in the months running up to the Brexit vote.
Wages have failed to keep pace with price rises, resulting in the biggest squeeze on living standards since 2014.
But the weaker pound has had some positive side effects. It has attracted record numbers of tourists and made exports from the UK more competitive in overseas markets. Some economists believe that will help offset some of the domestic pressures on growth.
The effects of a sharply weaker pound – down about 15% against the dollar since the referendum – have left the Bank of England with a delicate balancing act. At this month’s interest rate setting meeting, policymakers were divided over where to set borrowing costs. Three members wanted to raise interest rates to curb inflation, the other five wanted to leave them at the record low of 0.25% to shore up growth prospects.
Governor Mark Carney said this week that now was not the time to raise interest rates. But the Bank’s chief economist Andy Haldane said it would be prudent to tighten policy before the end of the year.
David Blanchflower, another former member of the Bank of England’s monetary policy committee, said political uncertainty was making life hard for policymakers as well as consumers and businesses.
“Steady as she goes isn’t what is happening,” said Blanchflower, a professor of economics at Dartmouth College in the US.
“It matters to the central bank and all of us that there is no credible government and no dependable fiscal authority. We have no clue what economic policies the government will implement and whether failed austerity is dead and buried. It should be.”