When David Cameron set out to create a “two-speed Europe” , the former prime minister did so with the words of the Eurosceptic Tory right ringing in his ears.
Europe was doomed. Mounting problems for Greece and rising numbers of immigrants showed that Britain must cut itself free from a failing union. Far from prospering from our membership of the world’s largest economy, the EU was hindering mighty Britannia. Take back control. Let Brussels sink.
“We’ve shackled ourselves to a corpse,” said Douglas Carswell in the days before he abandoned the Tory whip to join Ukip. “We pay for the privilege of being members of this poverty-producing club.”
How the tables have turned. Britain now appears stuck in the slow lane of a different kind of two-speed Europe. The UK economy has made its slowest start to a year since 2012, while the eurozone grows twice as fast. The former grew by a tepid 0.3% in the three months to June, while the the latter expanded at a much healthier 0.6%. The UK economy grew at an annualised rate of 1% in the first six months, less than half the average growth rate of about 2.5% in the years running up to the EU referendum.
It’s a better picture than the fire, brimstone and oblivion George Osborne forecast ahead of the Brexit vote, but Britain isn’t keeping pace with the corpse it’s unshackling itself from.
The reason for the changed landscape? Brexit and the economic uncertainty it unleashed, according to David Blanchflower, a former member of the Bank of England’s monetary policy committee. “Britain is fast become the sick man of Europe,” he wrote in the Guardian last month.
Looking a little closer, sterling tells the story of our parting of ways. The pound has fallen to its lowest levels in eight years as the UK economy sputters, but it’s also falling because the euro is gaining ground – part of a broad recovery under way since 2014.
British holidaymakers buying currency at some UK airports have been offered as little as €0.86 to the pound in recent weeks. A pound is currently worth €1.09 on the money markets, down from €1.31 before the Brexit referendum, and some economists expect it to reach parity.
It’s at home, however, that sterling’s fall in value has had its most deleterious effect on the economy. The slump boosted inflation to 2.6% in July and the Bank of England expects the cost of living to rise further, forecasting an increase in the consumer price index to 3% by next month.
Higher prices are putting pressure on household spending, a key driver in the UK economy. The impact from the pound’s fall of more than 16% since the referendum has fed through into higher prices for imported goods, which in turn has pushed up prices on the high street.
Consumers are tightening their belts as costs increase while wages aren’t going up anywhere near as fast. Earnings increased at a rate of 2.1% in June, failing to match the rate of inflation and meaning a 0.5% drop in real income.
As a consequence, spending is growing at its weakest rate in almost three years. It was only shopping in supermarkets that kept retail sales growing in July as other retailers’ business fell off. Rail fares are set to rise by 3.6% next year, compounding the pain.
On the plus side, unemployment is at levels unseen since the mid 1970s. That could help increase workers’ bargaining power in seeking higher pay, but it has yet to push up earnings significantly. There are also signs that inflation could be coming close to its peak, after failing to rise as much as expected in July.
There is hope the drop in sterling can make Britain’s manufacturing sector more competitive as our products become cheaper for foreign buyers, but manufacturing only accounts for 10% of the UK economy and there are few signs the boost has been commensurate with the drop in the value of sterling. Put simply, the manufacturing sector should be doing even better than it is, given the weak pound.
Contrast the picture with Europe, where production is racing ahead. The most recent eurozone purchasing managers’ index, a key barometer of economic activity, came in better than its equivalent measure in the UK for the fourth straight month in July. Economic confidence is at its highest level in a decade. The European commission’s measure of economic sentiment increased to 111.9 in August, its highest level since July 2007, just before the financial crisis hit.
Nor are measures of business optimism in the UK keeping pace with Europe. Results of a survey of company executives show their confidence about future production growth remains at the average levels seen over the past five years. The consultancy Pantheon Macroeconomics said this suggests firms will only invest cautiously in extra capacity.
The latest official figures from the Office for National Statistics show this to be the case in the three months to June, when business investment contributed nothing to economic growth. That indicates that firms are standing on the sidelines, fearing that spending now might be wasted should the economy fall off a cliff in the not-to-distant future. Who could blame them given the cloudy political picture?
The TUC has called for the government to leave single market membership on the table to give businesses confidence to invest, a position that Labour, has now adopted. The party with the most socialist agenda in a generation now also has the most business friendly one too.
Despite the recent sluggish performance of the economy, City economists expect an improvement in the second half of the year. That could help steady ministers’ nerves as they negotiate Britain’s divorce in Brussels, but if isolation from Europe crystallises in the event ministers fail to reach a deal, there is gathering evidence the UK economy will suffer while our biggest trading partner carries on unharmed. UK exports to the EU were worth £241bn in 2016, and accounted for 44% of all of the country’s exports. British imports from the EU were worth £312bnand accounted for 53% of all imports.
Cameron failed to build his vision of a two-speed Europe, in which Britain remained inside the EU, but on the edge of a eurozone binding itself ever closer.
Theresa May is finding it harder still to deliver Brexit. What form it will take is still up for grabs, with the Tory party riven by infighting and the government having a wafer-thin majority. Without clarity and progress, the economy suffers.
Far from leaving a Europein its death throes, Britain is struggling under the weight of the Brexit vote, shackled to its damaging consequences.