Professor of economics at Dartmouth College in the US, and member of the Bank of England’s monetary policy committee from 2006 to 2009
The economic news on Brexit continues to be bad, horrid or disastrous. The growing risk of a no-deal Brexit is inevitably hitting business activity. Oh what a surprise!
The Bank of England, after warning of the dire consequences of a disorderly Brexit, held rates steady at 0.75% at its December meeting last week. However, it warned that since the last monetary policy committee (MPC) meeting a month ago that “Brexit uncertainties had intensified”. It noted that those uncertainties, coupled with the slowing global economy, has weighed on the near-term outlook for UK growth. The MPC also reported that its market contacts viewed uncertainty about Brexit as having had an adverse impact on sterling.
The FTSE 100 has fallen and the FTSE 250 – which has more British companies focused on the domestic market than the international firms in the FTSE 100 – is down from its peak this year of 21,324 in June and its November peak of 18,719, slumping to 17,446 on 20December. Investors are running scared.
GDP growth of 0.6% confirmed by the Office for National Statistics for the third quarter looks like a highpoint and it is likely downhill from here. Business investment, which is likely to have been especially hard hit by this Brexit uncertainty, has fallen for each of the past three quarters and is inevitably going to remain weak going forward. Retail sales, which rose 1.4% from October, were better than expected but seem set to weaken sharply. Several retailers though have warned of tough trading this winter. The Sports Direct boss, Mike Ashley, said November was “unbelievably bad”, while Superdry and the online retailer Asos have also warned of dismal trading.
The Brexit vote has hit consumers in their pockets and harmed the economy. Meanwhile the fear of crashing out without a deal next year is reducing demand for bigger purchases. The future is too uncertain to keep on spending.
Real weekly wages according to the ONS picked up for the fifth month in a row, averaging £497 per week in 2015 constant prices but remain 5% below their £522 peak in February 2008, just before the recession started. The Bank’s agents have reported that pay growth was only slightly higher than it was a year ago. Plus the pay experts XpertHR reported that pay settlements were around 2% at the beginning of 2018 and had picked up to 2.5% by the middle of the year, yet had now fallen back to 2% again.
Political chaos and incompetence have market consequences.
Independent business economist, and member of the MPC from 2006 to 2011
The past month has seen quite a few negative indicators for the UK economy. Consumer confidence is weak, car sales and motor vehicle production are down, and business surveys point to slowing growth. Though November retail sales were more positive than expected, this is a very volatile indicator. At the same time, there has been a downturn in confidence in financial markets, and political uncertainty around Brexit has increased sharply.
After strong growth in the third quarter of this year, it is quite likely that economic progress has ground to almost a halt in the fourth quarter. Employment growth is now very sluggish. The fall in oil prices has helped consumers by pushing down inflation, and wage growth has picked up. But the general climate of political and economic uncertainty is holding back the progress of the UK economy.
It is also worth noting that even though inflation has reduced slightly, it has been above target for nearly two years. So even though short-term inflation developments may be favourable for consumers, the longer-term picture is not so positive.
Brexit uncertainty continues to be a major overhang for the UK economy. The deepening political crisis shows little sign of abating, and the business community is showing increasing signs of concern. Talk of a no-deal Brexit is adding to the general climate of uncertainty for both consumers and businesses.
The current quarter and the first quarter of next year are likely to see very sluggish growth in the UK economy, if we get any growth at all. The growth surge earlier this year has come to an end, and the negative impacts of Brexit are likely to be a major drag on the UK economy until next summer. Then, businesses and consumers can take stock in the light of any Brexit agreement which has been concluded. For now, firms and households are likely to remain extremely cautious.