Brexit economy: turning up the heat on household finances | Business

  28 Aug 2018

The British economy is failing to deliver stronger growth in workers’ pay, as the mounting risk of a no-deal Brexit turns up the pressure on household finances, according to a Guardian analysis of economic developments over the past month.

Pay growth in Britain has dropped to its weakest in almost a year despite the unemployment rate hitting a 43-year low. At the same time, recent weakness in the pound amid the growing chance of a no-deal Brexit is poised to push up the rate of inflation, triggering a renewed squeeze on living standards.

Despite some pockets of strength for the economy, there are growing signs of weakness after the Bank of England raised interest rates above the emergency level set since the financial crisis. Ushering in a new era of higher borrowing costs for consumers and businesses, the move comes as ministers prepare the public for Britain crashing-out of the EU without a deal with Brussels.

Writing in the Guardian, Andrew Sentance, a former member of the Bank’s rate-setting monetary policy committee, said heightened talk of a no-deal Brexit would hold back business investment, while arguing higher inflation would limit the spending power of consumers.

“Though GDP growth picked up in the second quarter of this year, it would be premature to conclude that the Brexit-induced slowdown in the UK economy is coming to an end,” he said.

To gauge the impact of the referendum outcome on a monthly basis, the Guardian has chosen eight economic indicators, along with the value of the pound and the performance of the FTSE 100. Economists made forecasts for seven of those barometers before their release, and in three cases the outcome was better than expected, while two met expectations.

In the latest figures, unemployment is at the lowest level since the winter of 1974-5, which should drive up the bargaining power of workers to demand higher pay.

However, the annual growth rate of total pay slipped from 2.5% to 2.4% in the second quarter of the year, while regular pay growth eased from 2.8% to 2.7% even though the number of unfilled vacancies reached 829,000 and there was a fall of 86,000 in the number of EU nationals working in Britain.

Writing in the Guardian, David Blanchflower, another former member of the Bank’s MPC, said the present rate-setters at Threadneedle Street had been made to look clueless by the latest figures, as they had forecast wage growth would gradually accelerate.

“The fact that the MPC seems to have no idea what it is doing is a major concern. This is not going to end well,” he said.

Rising petrol prices have driven inflation upwards for the first time this year, with the consumer price index hitting an annual rate of 2.5% last month. Weakness in sterling as Theresa May struggles to win support for her Brexit vision is likely to drive the rate higher, as foreign imports become more expensive, according to economists.

There were some pockets of strength from the latest dashboard reading. Warmer weather and England’s extended World Cup run appear to have encouraged greater levels of consumer spending, while record employment helped to boost the public finances from more people paying income tax.

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Britain recorded the biggest budget surplus in July for 18 years, giving Philip Hammond more wriggle room as he considers ways to fund the Conservatives’ commitment to raise spending on the NHS by £20bn.

Despite economic growth in the second quarter recovering from a slowdown earlier this year, surveys of business activity pointed towards weaker levels of economic activity ahead. Britain’s dominant services sector was unexpectedly weak in July, while growth in manufacturing output also dropped. Britain’s factories have fallen to ninth in the world behind France, reversing a recovery in its performance since the financial crash.

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