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‘The lull before the tsunami’: economists on the Brexit watch data

Two former members of the Bank of England interest rate-setting committee on what lies ahead for the UK after the EU referendum

People outside a Jobcentre
‘The bad news already is prices are rising, wage growth is slowing and unemployment is up.’ Photograph: Matt Cardy/Getty Images

David Blanchflower, professor of economics at Dartmouth College, New Hampshire, and former member of the Bank of England’s monetary policy committee (MPC) from June 2006 to May 2009:

These are still early days to determine what has happened to the UK economy after the Brexit vote because there are lags before any impact is felt; lags before there are measurable effects; and even longer lags until the data gets published. We only have hard data through August.

The bad news already is prices are rising, wage growth is slowing and unemployment is up. The volume of retail sales was flat in September versus August. The fall in the pound has already generated a pick-up in inflation. The consumer prices index was up from 0.6% to 1% in the latest ONS release and is expected to trend steadily higher soon. This is especially bad news for workers whose real wages are still about 7% lower than they were at the pre-recession peak in 2007.

Real wages have been on the rise for the last couple of years as inflation tumbled. The latest data for the month of August shows that annual wage growth, not adjusted for inflation, was 2%, down from 2.4% in July. The concern is that by the middle of 2017 prices of goods will start to rise faster than wages, lowering living standards. Unemployment is on the rise again, although it is somewhat unclear by how much because the ONS data is so bad. Estimates range from 10,000 to 144,000 on the month.

The ONS last week published data for unemployment for the average of June to August, which it compared with the average of March to May and claimed that the number of unemployed rose by 10,000. But it seems the real jump was likely a lot larger than that. Deep inside the ONS website you can find the underlying monthly data. Here it is in millions.

March: 1.73m

April: 1.58m

May: 1.62m

June: 1.71m

July: 1.55m

August: 1.69m

Averages

March-May: 1.64m

May-July: 1.63m

June-August: 1.65m

The data shows from the latest single month estimate, which is what every other major country in the world publishes, that unemployment rose 144,000 between July and August. This may be too high, given that these monthly numbers are unstable. If you average the months together as the ONS does, then it is true that unemployment jumped by 10,000, from 1,646,000 in March-May to 1,656,000 in June-August.

But that doesn’t seem the right comparator. If you compare the rolling quarter of May to July with June to August, which seems much more sensible, the rise is actually a really worrying – and more believable – 25,000. Whether the true rise in unemployment is 10,000; 25,000 or 144,000 the rise is bad news of course, as unemployment hurts. This is surely the lull ahead of an oncoming Brexit tsunami.

A man fills his car with petrol at the pumps
Pinterest
Petrol prices are rising. Photograph: Anthony Devlin/AFP/Getty Images

Andrew Sentance, senior economic adviser at the consultancy PwC and former member of the Bank’s MPC from October 2006 to May 2011:

Since the referendum result we have seen some mixed economic indicators. On the consumer side of the economy, growth has been resilient. Even though retail sales were fairly flat in September, third-quarter retail sales volumes were 5.4% up on a year ago. This is roughly in line with the post-crisis high in the fourth quarter of 2014, and before that we have to go back to 2003-04 to find stronger retails sales growth.

Consumers, however, have continued to benefit from very low inflation. That is now changing – with CPI inflation picking up to 1% in September – though this is the tip of the inflationary iceberg created by the recent fall in the pound. CPI inflation is set to rise to at least 2.5-3% by the end of next year – and possibly higher. So consumer spending is likely to slow down over the next 12-18 months as inflation bites into the growth of spending power.

An economic slowdown is already apparent in the labour market, with job growth easing – though it remains positive and the unemployment rate is still below 5%. But the key test of how well the economy holds up during the Brexit process will be investment spending. At present, we have limited information about how investment has performed post-Brexit vote. There is anecdotal evidence that businesses are becoming more cautious about investment – particularly in sectors which could be affected by the UK leaving the EU, such as manufacturing and financial services. But it will take a while for this to feed through to real spending decisions in the UK economy. It will not be until 2017 or 2018 that we see the full investment implications of the uncertainty created by the Brexit referendum decision.

Our PwC growth forecast remains at around 1% for next year, about half the recent UK growth rate. That will push the UK down the G7 growth league, below the US, Canada, Germany and France. So our economy will be taking a hit over the next year or two in the form of lower growth, but an outright recession should still be avoided.

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This entry was posted on October 25, 2016 by and tagged , , .

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