Serpent's Egg

The Eroticism of Fat Men

Brexit economy: UK faces squeeze on living standards

The latest monthly Guardian analysis finds signs of a slowdown as prices rise and real pay shrinks

Woman shopping in Tesco supermarket
Rising prices for fruit and vegetables at UK supermarkets are just one sign of growing inflationary pressures. Photograph: Chris Howes/Wild Places Photogra/Alamy

British households are being warned to prepare for a tightening squeeze on living standards, as a Guardian analysis shows the Brexit vote’s blow to the pound is stoking inflation while pay packets are shrinking in real terms.

As Theresa May prepares to trigger article 50 next week, kicking off the formal process of the UK leaving the EU, the economy continues to defy the doomsayers who predicted a sudden downturn after the referendum. But signs of a slowdown are now emerging as higher prices put pressure on companies and consumers alike.

Nine months on from the referendum, the Guardian’s monthly tracker of economic news shows inflation is at its highest level for more than three years, retail sales have lost momentum and pay growth has slowed significantly despite the lowest unemployment rate for more than a decade.

But the housing market appears to have escaped the post-referendum downturn that some commentators were predicting and though consumer spending slowed at the turn of the year, it recovered somewhat last month.

There is also evidence that Britain’s trade performance has been boosted by the pound’s fall since the referendum and strong tax receipts have helped improve the state of the public finances.

To gauge the impact of the Brexit vote on a monthly basis, the Guardian has chosen eight economic indicators, along with the value of the pound and the performance of the FTSE.

The dashboard for March shows a better than expected performance in five of the eight categories. Two were worse than expected. Inflation continued to rise and in February jumped higher than economists had forecast.

Stock markets have set new record highs but the pound remains down around 16% against the dollar with repercussions for an economy heavily reliant on imports.

At 2.3% last month, inflation was the highest since September 2013 and above the Bank of England’s 2% target. It is expected to rise further this year thanks to higher crude oil prices and because the weaker pound is making imports such as food ingredients and fuel more expensive. The latest official snapshot of living costs showed fuel cost 19% more this February than a year ago.

Consumers also had to pay more for many groceries as a long period of food price deflation came to an end. The pound effect on imported food was compounded for some groceries by shortages after bad weather in southern Europe hit crops. The price of an iceberg lettuce, for example, jumped to an average 93p in February – from 54p in January – as supermarkets imposed restrictions on the number of lettuces per customer.

Intensifying fears over household finances and the outlook for consumer spending, wage growth again missed expectations in the latest official update, which covered the three months to January. The 2.2% year-on-year rise in average weekly earnings was still ahead of inflation. But for January alone, wage growth slowed dramatically to 1.7%, making it weaker than the main measure of inflation at 1.8% that month.

Writing in the Guardian, a former member of the Bank of England’s monetary policy committee, David Blanchflower, said the rising pressure on household incomes was bad news for consumers and producers.

“With prices and wages heading in different directions consumers are set to feel the pinch in 2017,” said Blanchflower, professor of economics at Dartmouth College in the US.

“It is hard to see much good economic news this month. The Brexit vote is now starting to have major negative consequences and it is only going to get worse.”

The pressure on household finances bodes ill for the wider economy where consumer spending has been the main driver of relatively robust growth.

At his budget earlier this month, Philip Hammond was able to announce a brighter outlook for growth this year from the government’s independent forecasters. The Office for Budget Responsibility raised its forecast for GDP growth this year to 2% from 1.4% made at the time of November’s autumn statement.

But it highlighted many uncertainties ahead, and said there was little by the way of precedent to know how consumers and businesses would react to the Brexit process. Warning that support to the economy from household spending would wane as people contended with higher prices, the OBR predicted growth next year would be slower than previously thought, at just 1.6%.

Business and consumer surveys appear to be bearing out that prediction, with higher costs for companies and rising prices for shoppers weighing on sentiment.

Figures on Thursday showed retail sales volumes rose in February, beating market expectations, but they were down when taking the latest three months together, signalling the weakest underlying performance for seven years.

That picture chimed with a survey published this week suggesting UK households were the most downbeat about their finances since 2013.

Closely watched polls of companies in the services and manufacturing sectors signalled that activity slowed last month as they grappled with higher costs. A better performance in the smaller construction sector was not enough to offset that weakness and the compilers of the reports – the Markit/CIPS purchasing managers’ indices – said GDP growth looked to have shifted down a gear to 0.4% in the first quarter from the relatively strong 0.7% growth in the final quarter of 2016.

Some companies say skills shortages are exacerbating their cost pressures amid early signs that some EU migrants are starting to leave the UK. The Resolution Foundation thinktank said its analysis of official figures showed the biggest falls in EU workers were among graduates and those working in banking, the public sector and construction.

The Bank of England has indicated it is watching dynamics in the labour market closely, in particular pay growth, as it continues to tread a tightrope between supporting growth and jobs while ensuring inflation does not rise too quickly.

Under governor Mark Carney, policymakers have until recently stressed that they are happy to let inflation rise some way above its 2% target. But the minutes of the latest policy meeting suggested a split was emerging among the nine people charged with setting interest rates over how much inflation should be tolerated before taking borrowing costs higher again from their current record low of 0.25%.

Andrew Sentance, also a former member of the MPC, said the latest pick-up in UK inflation showed that the squeeze from higher global inflation and the fall in the pound was coming through to consumers.

“I have been arguing for some time that interest rates should be gradually rising. The problem this year is that the slowdown in the economy could make that more difficult, even though it would be the right policy,” added Sentance, a senior economic adviser at the consultancy PwC.

“The MPC will probably regret not having acted earlier as the pound continues to weaken and inflation surges.”

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This entry was posted on March 24, 2017 by and tagged , , , .
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