So we’re one year (one month and one day) on from the 24th of June, the day Britain woke up to the public’s vote to leave the EU. What followed was a flurry of analyses and comments about the potential impact of this historic decision on the UK economy.
Most analysts agreed that this can’t be good; after all, the EU is the destination of almost half of all UK exports, not to mention the deep integration in both the economic and political spheres brought about by 40 years plus of UK membership in the EU.
Some of the commentary warned about almost immediate cataclysmic consequences for the UK economy. Well this hasn’t really played out, but things aren’t rosy either.
Let’s have a look at 7 highlights from the UK economy since the EU Referendum:
1. UK economic growth has slowed
The UK economy powered through in the two quarters after the EU Referendum to grow by 0.5% in 2016q3 and 0.7% in 2016q4. This solid rate of growth prompted many analysts to proclaim “business as usual” for the UK economy in the post-Referendum period.
Then came the first quarter of 2017 to dampen optimism. While economists had predicted a slowdown in economic activity as household consumption buckled under the trend of rising inflation and sluggish wages, the 0.2% growth in 2017q1 was below expectations.
Whether this is temporary or not will become clearer on Wednesday when the ONS releases its first estimate of GDP for 2017q2. So far, survey data point to around 0.3-0.4% quarterly growth, not exactly spectacular.
2. Manufacturing has done well since the Referendum
Manufacturing output has made some large strides since the trough that lasted for about a year and a half between end-2014 and the start of 2016. The sector has seen output grow by 0.7% since 2016q2, not bad at all given the uncertainty overhang in the UK economy.
If we extend the period covered to 2016q1 – when the pound first started its slide – manufacturing output has expanded by a solid 2.5%, the highest quarter-on-the-same-quarter-a-year-ago rate since 2014q4.
3. The sterling depreciation has not fixed our trade balance
A lot has been said about the benefit of the sterling depreciation for UK exports. In fact there were expectations that a lower value of sterling would do most of the job towards shrinking the UK’s overblown trade deficit.
While exports have indeed done well, imports haven’t budged one bit, something that EEF has been saying for some time now. We warned that the impact of the sterling depreciation on the manufacturing sector was more nuanced than economic theory suggests given the dependence of manufacturers on imported materials and components.
Actually, this has left us with a larger trade deficit than before the EU Referendum and sterling depreciation took place.
4. But it has generated inflationary pressures
While the impact of the sterling depreciation on the trade deficit has defied optimistic predictions, it has not disappointed on the inflation front. The pound’s depreciation has pushed through inflationary pressures in producers’ supply chains and raised the cost of imported goods and services.
Consumer price inflation has climbed to 2.6% in the year to June 2017, from just 0.5% a year ago and 0.0% two years earlier. The worst could be near an end however, with inflationary pressures subsiding slightly in June from 2.9% in May as the impact of the sterling depreciation washes through. Same holds for manufacturers’ input prices where pressures have eased to a 9.9% year-on-year rise in June, from a peak of 19.9% in January 2017.
5. We’re unlikely to get a pay rise anytime soon
The labour market has been creating jobs like there’s no tomorrow but this hasn’t translated to decent wage growth. Average weekly earnings only grew by 1.8% in May 2017, even though unemployment has dropped to a forty year low of 4.5%. Taking inflation into accounts, this means that consumers saw their real earnings deteriorate by 1.1% in May.
This doesn’t bode well for household consumption, the main engine of GDP growth in the UK over the past few years. Earnings are perhaps the number one indicator on the BoE’s radar at the moment and unless we see some signs of domestically generated inflation, the MPC is likely to hold fire in the August meeting.
6. Meaning consumers are reaching their spending limit
Rising inflation and sluggish wage growth has spelled bad news for consumers. Households have been dipping into their savings to fund their spending sprees but this looks to be approaching its limit with the saving ratio at 1.7%, the lowest since records began in 1963.
We already saw the contribution of household spending to GDP growth diminishing to just 0.2pp in 2017q1 from 0.5pp in 2016q2. Households are unlikely to continue doing the heavy lifting for the economy in 2017 and the dwindling contribution of private consumption to GDP will weigh on UK growth this year.
7. And businesses are not spending either
Business investment has not collapsed as many predicted post-Referendum but it hasn’t boomed either. Total business investment has been flat between 2016q2 and 2017q1, while manufacturing investment has seen a big contraction of 10%.
It’s hard to attribute the sluggishness of investment to Brexit uncertainty without further evidence but this data could be the first signs of a more worrying trend on the corporate spending side.