Britain’s economy in the first year since the Brexit vote has been a tale of two halves. A strong performance towards the end of 2016 has been followed by weakness this year.
Households accelerated spending before Christmas last year, saving less and borrowing more, but as prices of goods and services have risen faster than wages and incomes, consumers have increasingly struggled in 2017 to cope with the tight squeeze on their finances. As a result, spending growth has slowed to a crawl.
Although business surveys have generally been strong this year and there have been high-profile announcements of investments by overseas companies in the UK, the hard data from the manufacturing, construction and services industries have been weak. In the first quarter the huge services sector and the production industry both barely grew, with output rising only 0.1 per cent.
This was a time when activity in the eurozone, Britain’s largest trading partner, accelerated, helping to push Britain from the top of the Group of Seven league table of economic growth rates to the bottom.
But the slowdown is as likely to be a blip as a trend. UK growth edged up a little in the second quarter, and the hung parliament outcome of last month’s general election and start of Brexit negotiations between Britain and the EU have not definitively changed the economic outlook.
Although many economists have become more pessimistic since the start of the year, most of the apparent gloom reflects the UK’s weak growth in the first quarter rather than a new appraisal of future prospects.
Some economists, such as Sam Tombs of Pantheon Macroeconomics, see the outlook as troubled, with “households’ real disposable income shaping up to be broadly flat this year”. Others, including Jonathan Loynes of Capital Economics, see the slowdown at the start of the year as “a temporary blip”.
The uncertainty unleashed by the UK vote to leave the EU on 23 June last year increases the need for a clear guide to Brexit and the unfolding economic data. These five charts will be periodically updated and augmented.
- The overall performance of the UK economy
- The household savings ratio
- Living standards
- The value of the pound
1. Overall performance of the economy
In terms of growth, Britain moved from the top of the G7 league table in the fourth quarter of 2016 to the bottom in the first three months of this year when national output increased 0.2 per cent.
The growth rate has improved to 0.3 per cent in the second quarter but still remains “tepid” in the language of the International Monetary Fund, and considerably slower than the average 0.5 per cent that the UK has achieved since 2010.
Britain tends to publish its growth figures first among the G7 countries, so comparisons with others are not yet available, but the squeeze on incomes looks likely to keep the UK towards the table’s bottom end.
It is still too early to to say that Brexit has damaged the performance of the economy because the slowdown might reverse once the squeeze on incomes passes. However, the second consecutive disappointing quarter will increase concerns that the outlook has dimmed.
2. Household savings ratio
The proportion of income saved by households hit a 53-year low in the first quarter, highlighting that consumer spending has been propped up by people saving less and borrowing more to maintain their levels of consumption.
Some of the decline in the savings ratio in this chart is, however, exaggerated. Incomes in the first quarter were artificially depressed by unusually high tax payments, reflecting how companies made large dividend payments one year earlier ahead of a more stringent tax regime. The decline also reflects an error the Office for National Statistics has identified that understated incomes in its data, which is due to be rectified soon.
These are important considerations that make the savings ratio more sustainable than it appears at first sight, but ONS corrections will not change the overall finding that consumers maintained spending by saving less after the Brexit vote. This trend cannot continue.
3. Living standards
Comprehensive data on living standards will not be published for roughly two years, so the best available indicator of prosperity following the referendum is the rate of growth of earnings adjusted for the rise in prices.
This provides bad news for Britain because the decline in sterling’s value since the UK voted to leave the EU has already led to higher prices but not increased wages. After adjusting for inflation, earnings growth has fallen from 1.9 per cent in the three months before the EU referendum to negative in recent months. The latest data show real wages falling at an annual rate of 0.7 per cent.
The cause of the decline in living standards is more closely linked to a rise in inflation rather than a fall in average wage growth, but both have played a part. And with social security benefits for non-pensioners frozen, real income growth is also likely to have fallen.
Every indicator of the number of people in the labour market has been positive since the EU referendum. The unemployment and underemployment rates are down, while participation in the labour market, the employment rate and vacancies are all up.
With such a clear and positive picture, the best data are simply the headline unemployment rate, which has fallen from 4.9 per cent to 4.5 per cent in the past year, to reach its lowest level since 1975.
With labour market quantities so strong, the puzzle is why employees are not able to translate high demand for their skills into increased wages and growth in living standards. The disconnect might suggest there is a hidden weakness in the jobs market, but it is pretty well buried because the data are comprehensive and strong.
Other records are also being broken in the labour market. The employment rate is at its highest since current records began in 1971, indicating that those who want work can find it.
5. Value of the pound
The Brexit vote marked a sudden shift in the fortunes of sterling. The value of the pound had been falling against the euro before the referendum, but plunged to more than 10 per cent below its level at the start of 2016 against both the US dollar and the euro by the day after the EU vote.
It has not recovered. Against the US dollar, sterling is 11 per cent down on the start of 2016 and 18 per cent down against the euro. In recent months the gap between the world’s two most important currencies diverged as the euro gained against a weakening dollar. Sterling has also gained, but not as much.
This change in sterling’s value has underpinned most of the economic changes in the first year since the EU referendum. It has caused the squeeze on household incomes but not yet led to any uptick in British exports.
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