Sunday, December 10

Pound falling and rising inflation fuel fears



An exchange rate sign in Paris The British economy’s post-Brexit vote bounce is losing momentum as the weak pound and higher inflation herald a squeeze in living standards, according to a Guardian analysis.

Although official growth figures to be published on Thursday are likely to show the economy will avoid recession in the second half of the year, the latest Guardian analysis of the post-referendum economy shows a more mixed picture.

The most notable shift over the last month was a further sharp fall in the value of the pound. Against the dollar, the pound is lingering around the $1.22 mark – about 18% lower than on 23 June, the day of the referendum.

At one point a “flash crash” in the currency markets pushed the pound briefly to about $1.15. It quickly recovered, but the underlying pressure on the currency has remained following Theresa May’s declaration that she will trigger article 50 before the end of March 2017.

The Guardian has chosen eight economic indicators, as well as the value of the pound and the performance of the FTSE, to track the economy on a monthly basis.

The dashboard for October shows that four of the eight categories have performed worse than expected, two were as expected, and two were better. Inflation jumped more sharply than expected to 1%, the highest level in almost two years, Britain’s trade deficit with the rest of the world widened, as growth in imports rose faster than exports, and retail sales were flat as shoppers were put off by higher clothing prices and exceptionally warm September.

Four months on from the Brexit vote, there are warning signs that consumers should prepare for a renewed squeeze in living standards, as the weak pound drives inflation higher and cautious businesses rein in wage growth.

The drop in the pound is starting to be felt by companies. This month Ryanair warned full-year profits would be lower than previously expected and Tesco stocks of Marmite and other household brands were temporarily depleted when the supermarket chain became embroiled in a row over price with the supplier, Unilever.

While the Office for National Statistics has cautioned that the post-referendum picture is still emerging, the Guardian’s dashboard shows pressure is building in some parts of the economy.

Writing in the Guardian, a former member of the Bank of England’s Monetary Policy Committee (MPC), David Blanchflower, says Britain is heading for a “Brexit tsunami”. Blanchflower, professor of economics at Dartmouth College in the US, adds: “The bad news already is prices are rising, wage growth is slowing and unemployment is up.”

Andrew Goodwin, lead UK economist at the forecast group Oxford Economics, also points to looming upward pressure on prices. He says: “Both the retail sales and inflation releases suggested that price pressures are on the turn. We expect consumer price inflation to accelerate sharply from this point onwards, averaging 2.7% in 2017. This will severely squeeze household spending power and cause spending growth to slow sharply.”

Andrew Sentance, another former MPC member, told the Guardian that a 1% inflation rate “is the tip of the inflationary iceberg created by the recent fall in the pound”.

Meanwhile the public finances worsened. The government had to borrow £2bn more than expected in September to balance the books, partly because of weaker tax receipts. As the outlook for the public coffers deteriorates even before the full impact of any Brexit effects takes hold, the UK chancellor, Philip Hammond, faces a major challenge next month when he delivers his maiden autumn statement. However, although the scope for giveaways appears to be diminishing, the chancellor is expected to ease the pace of austerity to support the economy.

Unemployment held steady at an 11-year low of 4.9%, while the pace of wage growth slowed slightly to 2.3% from 2.4%, as expected. However, fears are building that firms will put hiring decisions on hold and limit wage rises as they seek to rein in costs in an uncertain business environment.

On a more positive note, the dashboard indicates the Bank of England’s decision to cut interest rates to a new all-time low of 0.25% in August continues to support confidence in the housing market.

The first official estimate of economic growth in the period between between July and September will be published on Thursday and is expected to show growth more than halved to 0.3% from 0.7% in the second quarter. That would be better than many feared in the immediate aftermath of the vote, and better than the 0.1% growth predicted by the Bank of England in August.

Sentance, a senior economic adviser at the consultancy PwC, writes in the Guardian: “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.”

The International Monetary Fund is predicting the UK will be the fastest growing of the G7 leading industrial countries this year, with growth of 1.8%. The Washington-based Fund accepted that its prediction of a post-Brexit vote financial crash has proved overly pessimistic.

But UK growth is expected to slow considerably in 2017, as the consequences of the Brexit vote place increasing pressure on the UK economy.

The dashboard analyses economic performance since April, comparing key indicators with the predictions of those indicators, based on the consensus forecasts in polls of economists by Reuters.