The pound’s sharp fall since the Brexit referendum, and a mood of uncertainty among employers, have hit household budgets, creating a tough economic backdrop for British Prime Minister Theresa May’s snap election planned for June 8, a Guardian analysis shows.
The prime minister will be hoping the resilience seen in the UK economy will hold over the coming months, now that she has called an election in slightly less than a month. However, the Guardian’s monthly tracker of economic news shows living standards are already falling as rising prices outpace meagre pay growth.
That bodes ill for an economy reliant on household spending, and the latest indicators from Britain’s retail and leisure industries suggest they are feeling the effects of a tightening consumer squeeze. The export sector has failed to offset that domestic drag and GDP figures due this week are expected to show the economy slowed markedly at the start of this year.
Still, lending support to those who say May was right to call a vote sooner rather than later, unemployment remains low, the housing market is steady, stock markets are near record highs and business activity continues to rise — albeit at a slower pace.
How has the Brexit vote itself affected the UK economy? The economy appears to have lost momentum, but has comfortably avoided the recession some had predicted in the wake of the Brexit vote. Last week, the IMF was forced to admit yet again that it had been too gloomy on the consequences of the Brexit vote as it revised up its UK growth forecast for the second time in three months.
Writing in the Guardian, Andrew Sentance, a former member of the Bank of England’s monetary policy committee, said support for the UK from a strong global economy was being offset by domestic pressures.
“There are two big themes which stand out from this month’s data, and they show the UK being pulled in opposite directions by the global economy and consumer spending,” said Sentance, a senior economic adviser at the consultancy PwC.
“We should expect the consumer slowdown to dominate the growth picture over the course of this year ... GDP growth figures for the first quarter released at the end of this week are likely to confirm that the UK economy is already slowing,” he said.
To gauge the impact of the Brexit vote on a monthly basis, the Guardian has chosen eight economic indicators, along with the value of the pound and the performance of the FTSE.
The dashboard for April shows retail sales have dropped, inflation is at its highest in more than three years, wages are falling in real terms and Britain’s trade performance has deteriorated. However, unemployment remains low, house prices continue to edge up and businesses are expanding.
The deficit of the public finances fell over the last year and the government hit its borrowing target, but the public finances were worse than market expectations for the latest month.
Compared with economists’ forecasts, there was a worse-than-expected performance in three of the eight categories. Two were better than expected, with three as forecast.
Stock markets remain near record highs and the pound has been given a fillip by news of the election, with investors predicting the result will strengthen May’s position in Brexit negotiations with her EU counterparts.
Yet, compared with the day of June last year’s referendum, the pound is still down 14 percent against the US dollar and 10 percent against the euro. That weakness is now making itself felt in the real economy as imports become more expensive and shoppers are paying higher prices for a whole range of goods and services, from food to fuel.
The pound effect has combined with higher global oil prices to lift inflation to a rate of 2.3 percent in February and March, above the Bank of England’s 2 percent target. Yet while inflation is expected to climb higher, wage growth looks set to slow.
Employers are grappling with higher costs that give them less leeway for pay rises and the government continues to implement a public sector pay freeze.
The latest official figures show workers were already worse off in real terms in February as pay rose 1.9 percent on the year, but inflation stood at 2.3 percent. That pay weakness was despite Britain’s unemployment rate remaining at 4.7 percent — its joint lowest since 1975 — and continued reports of skills shortages.
Reflecting tighter household budgets, retail sales volumes suffered their biggest drop in seven years over the opening months of this year, dragging on the overall economy rather than acting as a driver of growth as they usually do.
In other signs of the strains on consumers, there has been an increase in borrowing on credit cards, while a key measure of what households have available to save has hit a record low.
David Blanchflower, another former Bank of England policymaker, said consumer spending was being supported by people borrowing more and running down their savings, but that could not last.
“Support for Brexit is likely to be driven by how the economy performs and whether living standards hold up and they aren’t,” said Blanchflower, professor of economics at Dartmouth College in the US. “I am hoping for some good economic news next month. I didn’t see much of any this month.”
There have been upsides from a weaker pound, including an influx of foreign tourists splashing out in British shops, restaurants and hotels to take advantage of the relative strength in their own currencies. Exporters also report that the pound’s drop has made their goods and services more competitive in overseas markets, even though the latest official trade figures were weaker than expected.
The overseas boost was clear in a set of business surveys that are closely watched by investors and policymakers for early clues to GDP growth. However, while activity has continued to expand according to those Markit/CIPS purchasing managers’ indices, their compilers say there has been a change of pace since last year and that GDP growth likely slowed to 0.4 percent in the first quarter of 2017, from 0.7 percent in the final three months of last year.
The first official snapshot of GDP growth in the opening months in the year is due on Friday and economists polled by Reuters also expect growth to slow to 0.4 percent.
[UK Treasury data on Friday showed lower-than-expected first quarter GDP growth of 0.3 percent, which was mainly due to a slowdown of output in the services sector, the department said.]
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