Britain’s economy is closing a turbulent year on steadier ground, as households defy the biggest squeeze on disposable income in memory, a Guardian analysis of economic news over the past month shows.
In a period in which Theresa May won a deal with Brussels to move the Brexit talks forward to focus on trade, the Guardian’s monthly tracker found pockets of strength in the economy – even as businesses express increasing concerns over the size of the challenge to come.
The UK could sign up to all the EU’s rules and regulations, staying in the single market – which provides, free movement of goods, services and people – and the customs union, in which EU members agree tariffs on external states. Freedom of movement would continue and the UK would keep paying into the Brussels pot. We would continue to have unfettered access to EU trade, but the pledge to “take back control” of laws, borders and money would not have been fulfilled. This is an unlikely outcome and one that may be possible only by reversing the Brexit decision, after a second referendum or election.
Britain could follow Norway, which is in the single market, is subject to freedom of movement rules and pays a fee to Brussels – but is outside the customs union. That combination would tie Britain to EU regulations but allow it to sign trade deals of its own. A “Norway-minus” deal is more likely. That would see the UK leave the single market and customs union and end free movement of people. But Britain would align its rules and regulations with Brussels, hoping this would allow a greater degree of market access. The UK would still be subject to EU rules.
A comprehensive trade deal like the one handed to Canada would help British traders, as it would lower or eliminate tariffs. But there would be little on offer for the UK services industry. It is a bad outcome for financial services. Such a deal would leave Britain free to diverge from EU rules and regulations but that in turn would lead to border checks and the rise of other “non-tariff barriers” to trade. It would leave Britain free to forge new trade deals with other nations. Many in Brussels see this as a likely outcome, based on Theresa May’s direction so far.
Britain leaves with no trade deal, meaning that all trade is governed by World Trade Organisation rules. Tariffs would be high, queues at the border long and the Irish border issue severe. In the short term, British aircraft might be unable to fly to some European destinations. The UK would quickly need to establish bilateral agreements to deal with the consquences, but the country would be free to take whatever future direction it wishes. It may need to deregulate to attract international business – a very different future and a lot of disruption.
There were however some concerning developments, as the cost of living squeeze intensified and there were signs that the country’s long jobs boom of recent years has come to an end.
Meanwhile, the International Monetary Fund used its annual health check of the UK to say that the Brexit vote in June 2016 was responsible for the economy’s slower growth and stress that the government needed a deal with the EU that kept trade as free as possible.
Businesses are also continuing to press the government to make further progress in talks with the EU, despite this month’s breakthrough, warning they will keep hiring and investment plans on ice without greater clarity. Firms want to see a transitional deal to smooth the UK’s exit from the EU as early as possible, however there may be a long wait amid political tensions within the government.
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 100. Economists made forecasts for seven of those barometers before their release, and in three cases the outcome was better than expected.
The latest dashboard shows how sterling staged a recovery against the dollar ahead of the government striking a deal with the EU to progress talks to focus on trade, while the FTSE has benefited from a global boom in share values as investors anticipate greater corporate profits due to a package of tax cuts put forward by the US president, Donald Trump.
Among the strongest indicators of short-term economic strength for the UK was an unexpected increase in high street sales. Economists had thought rising inflation and sluggish wage growth would lead to a drop in spending, which has been one of the big reasons for a slowdown for the UK economy this year.
But Black Friday promotions gave Britain’s retailers a much-needed shot in the arm, as sales figures for November show the American-inspired period of discounts led to a 1.1% increase in the total value of goods sold last month compared against October. City economists had expected a rise of 0.4%.
However, there were warnings that consumers may have simply brought forward their Christmas shopping to exploit the steep discounts on electrical goods and other items, which may lead to weaker sales in the traditional boom month of December.
Britain’s jobs-creation machine of recent years showed signs of chugging into reverse over the past month, as the latest official figures showed the number of people in work fell by 56,000 in the three months ending in October. The Office for National Statistics said the upswing that began in 2012 – which persisted for a year after the vote to leave the EU – had finally petered out.
There was also evidence of a growing skills shortages for British firms, with the ONS data showing 798,000 vacancies in the three months to October – the most since comparable records began in 2001.
Economists have argued a slowing economy and the political maelstrom around Brexit will make firms reluctant to hire workers. Although some have said the rising number of vacancies is due to a weaker supply of employable people, as opposed to an outright drop in demand among firms to take on new staff.
That could be caused by the biggest fall in net migration, as EU workers leave the UK following the Brexit vote. The latest official figures showed net migration to Britain fell by 106,000 to 230,000 in the 12 months to June.
Still, the rate of unemployment remained at its lowest level since the mid 1970s of 4.3%. But that did little to boost the bargaining power of workers to demand better pay, as average weekly earnings remained below the growth in prices at 2.3%.
The squeeze on British households intensified over the past month as the latest figures showed inflation edged higher to 3.1% in November from 3% in October. The Brexit vote has been directly blamed by economists, who say the fall in the value of the pound in the wake of the referendum has made it more expensive to import goods to Britain, pushing up prices on the high street.
The weak pound does however appear to have helped British exporters, with figures over the past month pointing to a jump in trade. Some economists are sceptical, though, suggesting that the increase has come from a recovery in global growth.
The Society for Motor Manufacturers and Traders said car production in 2017 was on course to show the first fall since the economy was in recession in 2009, with exports failing to make up for a sharp fall in domestic demand.
Britain continues to import more from the EU and the rest of the world than it exports to other countries, although there was positive news as the trade in goods deficit came in at £10.8bn in the three months to October, which was better than the forecast of £11.5bn made by economists.
Over the past month, there were also mixed messages from closely watched barometers of economic activity among businesses. Britain’s dominant services industry showed signs of slowing after several months of resilience, while there was an upturn for both the construction and manufacturing industries.
Although manufacturers only account for about 10% of the economy, they are benefiting from a boom in global trade, with the Markit/Cips purchasing managers’ index (PMI) for the sector rising to 58.2 in November from 56.6 in October – the strongest number in four years on an indicator where anything up from 50 measures growth.
Most economists now think UK economic growth will grow at about 1.5% this year before falling further in 2018, which is better than some of the gloomiest forecasts made just before the referendum for a Brexit-induced recession. However, it also places the UK among the slowest growing of the world’s major economies. The Organisation for Economic Co-operation and Development also expects growth to fall to 1.2% in 2018 and 1.1% in 2019, placing the UK at the bottom of the table for major nations.
The absence of the Brexit vote could also have led to higher growth rates in 2017, according to Ross Walker, head of European economics at NatWest Markets, who said expansion of almost 2% may have been achievable.
“The slowdown in the UK in 2017 stemmed, to a large extent, from the Brexit vote,” he said, pointing to the squeeze on households from inflation due to the weak pound, which had a knock-on effect for consumption and growth.
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