The economic pain of Brexit was always going to take a while to appear. This will be a slow squeeze, not a quick hit. The first signs are now there in the latest economic data. But just how dramatic the Brexit hit will be remains open to debate. At the moment most forecasters see slower UK growth next year but not a recession. Beyond that who knows?
Wednesday’s economic data followed the “ stronger than expected” theme evident since the Brexit vote. But there are indications of the start of a slowdown in the UK jobs market. Unemployment is now edging up, even though not enough to push up the official rate which is at a low 4.9 per cent.Wage growth remained solid at 2.3 per cent. But forward looking confidence indicators suggest that hiring will slow in the months ahead, with unemployment expected to edge consistently higher.
Sterling
While the UK starts in a strong position in terms of unemployment, the more significant hit may be to spending power. Falling sterling is bound to push up import prices – the tick up in inflation this week to an annual rate of 1 per cent is just the start.
Once inflation overtakes wage growth, real spending power will be squeezed. Financial data firm Markit said on Wednesday that its index of household finances had fallen to a five-month low of 43.8 in September, with strong fears in evidence of rising prices. In other words consumer confidence is looking a bit shaky.
None of this means that the UK economy is going to fall off a cliff overnight. But there is the risk of a steady deterioration, particularly as rising inflation and unemployment takes hold, and businesses hold back on investment decisions.
A lot will depend on sterling. If it continues to drop then this will feed through to higher import prices and hit the spending power of the UK consumer. The last few days have shown that sterling can rise, as well as fall, and given the extent of its fall after the Brexit vote – and to an extent before it – no one is quite sure what happens next.
Politics
The second key factor will be the politics. Indications at the Conservative party conference three weeks ago that
Theresa May
was championing a “ hard” Brexit hit sterling hard – and will also have affected business confidence.
A “hard Brexit”, meaning Britain also leaves the single market and the customs union, creates huge uncertainty about future trading arrangements for UK firms. This will hit business confidence.
While government economic policy often appears powerless to affect a country’s economic direction, what May and her ministers say – and, more importantly,what they do – is set to have a major impact over the next couple of years.
