The Brexit economy: remarkable resilience as spectre of inflation looms

The chancellor, Philip Hammond, has been given a boost ahead of his maiden autumn statement by a Guardian analysis showing the economy continues to confound gloomy forecasts for a post-referendum slump.

A bumper month for retail sales, a steady housing market, broad-based business growth and a drop in the jobless rate have all boosted hopes for a strong finish to the year for the UK economy.

Hammond is being warned, however, to look past the signs of early resilience to a challenging 2017 when Brexit talks begin in earnest, rising inflation starts to bite and the world gets to grips with Donald Trump taking over the US presidency.

For now, however, the pound has steadied on financial markets and the economic signals point to resilient consumers. That will provide some solace to Hammond as he prepares to deliver his speech on Wednesday, when he will be forced to concede that the longer-term outlook for the economy is gloomier than at his predecessor George Osborne’s budget just eight months ago.

To track the impact of the Brexit vote on a monthly basis, the Guardian has chosen eight economic indicators, as well as the value of the pound and the performance of the FTSE.

The dashboard for November shows a better than expected performance in five of the eight categories. Two were worse than expected and inflation was lower than economists forecast, defying expectations for it to rise swiftly on the back of the weak pound.

Five months on from the vote to leave the EU, the latest batch of figures show unemployment dropped to an 11-year low, retail sales rose sharply, house prices picked up, business activity continued to grow and the public finances improved. But Britain’s trade gap with the rest of the world widened and wage growth stalled.

The pound has recovered some ground in the latest month, as investor focus shifts away from the UK currency and instead to the euro after Trump’s victory raised fears of similar anti-establishment gains in a host of elections in the eurozone over coming months. Analysts also said the pound may have found a floor, having dropped 10% against the euro and 16% against the dollar since the referendum.

On stock markets, the FTSE 100 leading index is off a record high hit in October but is still 8% above it’s pre-referendum level. The more domestically focused FTSE 250 is 2% higher than it was on the day of the referendum.

Andrew Sentance, a former Bank of England policymaker, said price pressures were clearly rising.

“It is clear from the measure of input prices paid by manufacturers that a wave of inflation is coming through the pipeline driven by a weaker pound. We should therefore still expect to see inflation at around 3% or just below by the end of next year.

“That will squeeze real consumer spending growth, adding to the slowdown generated by uncertainty affecting investment plans.”
But behind the upbeat headlines there are growing signs the weak pound will push up prices and squeeze household budgets in the months ahead. Wage growth is expected to slow and economists warn that with employment growth already waning, pay will struggle to keep up with living costs next year.

Household worries about inflation are already rising after high-profile pricing tussles between supermarkets and big brands such as Typhoo and Walkers crisps.

Eight out of 10 consumers said they were worried that changes in inflation over the next 12 months would affect the cost of everyday goods, according to one YouGov poll for Barclaycard. As a result, people’s overall confidence in the UK economy and in their own finances waned.

For businesses, the pound’s weakness also weighed heavy. Despite the boost to competitiveness for those selling their goods overseas, exports fell in the latest trade figures while imports rose.

At the same time, the weak pound ramped up the cost of importing raw materials and manufacturers started to pass some of that on to their clients. Putting some solid figures behind the rows over Marmite and other foods, the latest official data on manufacturers’ costs showed they soared 12.2% in the year to October, the biggest increase for five years. So-called “factory gate” prices charged to their customers were up 2.1% on the year, the biggest rise for more than four years.

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Tesco ran short on Marmite and household brands in price row with Unilever. Photograph: Christopher Thomond for the Guardian

That was echoed in the services sector – encompassing shops, hotels, bars and banks – where businesses faced the biggest one-month jump in costs for 20 years in October, according to the closely watched Markit/CIPS services PMI report.

Business investment is expected to suffer as company bosses fret about those rising costs, as well as political uncertainty.

Economists warn that the nervous climate will translate into firms putting off big spending and hiring decisions. The Bank of England predicts a slowdown in business investment will weigh on overall economic growth next year.

Writing in the Guardian, a former member of the Bank’s monetary policy committee (MPC), David Blanchflower, said Hammond should heed those longer-term forecasts.

“The UK economy is slowing, there is no doubt about it. The incoming data so far though are mixed as it is early days post the Brexit vote,” said Blanchflower, professor of economics at Dartmouth College in the US.

“GDP growth isn’t set to slow sharply in the fourth quarter of 2016 but 2017 is likely a different matter.”

He urged the chancellor to respond with big initiatives to shore up growth, or risk further antagonising voters.

“It is time to condemn austerity into the dustbin of history. It is the unnecessary hang-up with debts and deficits that has got us into this fine populist mess in the first place.”

There was little hint of such a change of direction in a Treasury reaction to public finance data on Tuesday showing the deficit was smaller than expected in October.

A Treasury spokesman said: “As the chancellor has made clear, the government is committed to fiscal discipline and will return the budget to balance over a sensible period of time, in a way that allows space to support the economy as needed.”

Headline growth figures have defied gloomy forecasts made during a bitter referendum campaign and in the wake of the Brexit vote, when many economists predicted a recession.

An update on GDP from the Office for National Statistics later this week is expected to confirm its previous estimate that the economy grew a relatively strong 0.5% in the three months following the Brexit vote, down only slightly from 0.7% growth in the run-up to the referendum. But analysts believe details released with this latest GDP report will show business investment slowed following the Brexit vote.

Chris Hare, economist at Investec commented: “When economic uncertainty rises, business investment tends to be the first casualty – in such episodes businesses, tend to revert to ‘wait-and-see’ mode and postpone their capital spending plans.”

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