How has the Brexit vote affected the economy? February verdict

Sterling rallies in bumpy month

The pound rallied on foreign exchanges to its highest levels since the Brexit vote in January, although since the end of the month has given up much of its gains amid growing market turbulence. Sterling gained about 3% to hit more than $1.42 as investors bet on a weaker Brexit and the dollar sank after comments in Davos by the US Treasury secretary, Steven Mnuchin, who said a weaker dollar would benefit US trade. Markets have since taken a turn amid rising fears over inflation and higher interest rates. The pound is still worth considerably less than the $1.49 it was prior to the EU referendum.

FTSE 100 plunges amid global sell-off

Stock markets were plunged into turmoil in early February, bringing to a close a period of zen-like calm and seemingly unstoppable gains over the course of the past year. The FTSE 100 has fallen by almost 500 points over the past month, or about 6%, amid a US bond-market sell-off triggered by fears over rising inflation. The sell-off led stocks to plunge at the fastest rate in more than two years. The International Monetary Fund’s managing director, Christine Lagarde, warned of complacency in Davos earlier in January, arguing that the long period of low interest rates over the past decade had built-up potentially serious vulnerabilities in the financial sector. Now investors reckon rising inflation will need to be countered by rising interest rates – potentially upsetting the apple cart – and stocks have fallen as a consequence.

Worse than forecast

Inflation holds steady, keeping pressure on households

British households remain under significant pressure, as the rate of inflation stayed at its highest level for almost six years last month. Stoked by the pound’s weakness since the EU referendum, inflation has been stubbornly high for several months, and showed no signs of abating in January, as the consumer price index (CPI) held steady at 3% – the same level seen in December 2017. Economists had forecast the rate to fall to 2.9% as the sudden fall in the value of sterling begins to fade – however rising fuel prices at a time of sustained global growth are beginning to offset the dimming influence of the exchange rate on inflation. The Bank of England, which is tasked by the government to keep inflation at 2%, said it would need to raise interest rates somewhat earlier and to a greater extent than previously thought – which economists reckon could mean an increase in the cost of borrowing from as early as May.

Worse than forecast

Monthly trade deficit widens despite positive broader trend

Hopes of a trade boost for the economy from booming global growth and the weak pound benefiting exporters took a knock last month, as the latest figures show the gap between what Britain imports and sells abroad continued to grow. The total trade in goods and services deficit widened by £1.2bn to £4.9bn in December over the previous month, driven wider by an increase in fuel imports from non-EU countries. Excluding services, the difference between the value of goods brought into the country and sold abroad widened to £13.6bn, making it the worst month since September 2016. Labelled as “pretty poor” by City economists, the figures suggest trade will have acted as a drag on economic growth in the last three months of 2017.

Worse than forecast

Key industries give weaker signals for economic growth

Britain’s dominant services industry grew at its slowest pace in January since the aftermath of the EU referendum, as the economy got off to a sluggish start in 2018. The Markit/CIPS UK Services PMI fell to 53.0 in January from 54.2 in December, its weakest since September 2016 on a scale where anything above 50 indicates growth. Meanwhile, Carillion’s collapse rattled the building industry, where the rate of growth barely pointed to expansion, and even the manufacturing sector – despite being a key beneficiary of the weak pound and booming global growth – showed signs of a slowdown last month. Waning demand from consumers, pinched by weak wage growth and rising prices, has been a key problem for the services sector. Brexit uncertainty has hit construction firms, while inflation has eaten into profit margins for manufacturers.

Better than forecast

Public finances set for best year since 2008

The exchequer is usually in the black in January, due to self-assessed tax returns, but last month was a particularly good start to the year for the chancellor, Philip Hammond. Public sector net borrowing, excluding nationalised banks, was in surplus by £10bn in January – beating expectations for a surplus of £9.5bn. For the first 10 months of the 2017 financial year, the deficit – which is the difference between what the government spends and what it brings in from tax receipts – has fallen by £7.2bn compared with the same period a year ago to £37.7bn – the lowest figure at this stage of the financial year since 2008. Should the state of the national finances remain broadly similar over the final two months of the fiscal year, borrowing should undershoot the Office for Budget Responsibility’s forecast for the deficit to be £49.9bn, handing the chancellor even more good news when he makes his Spring Statement on 13 March.

Worse than forecast

Shock unemployment jump, although signs of wages rising

The number of people out of work in Britain rose at the fastest rate in almost five years, ending an unbroken two-year period of falls in the jobless rate. Although still close to the lowest levels since the mid 1970s, the shock increase in the unemployment rate to 4.4% in the three months to December from 4.3% in the three months to September will be of cause for concern to policymakers. There was a rise in the number of unemployed by 46,000 to stand at 1.47 million. However, at the same time, the number of people in work also increased, with the employment rate standing at 75.2%, up from 74.6% a year earlier. There was also more positive news for workers’ pay, with figures from the Office for National Statistics showing average weekly earnings excluding bonuses rose to 2.5% in the three months to December – beating City forecasts for growth to rise slightly to 2.4% from a reading of 2.3% for the three months to November.

Worse than forecast

Retail sales stage weak rebound from torrid Christmas

January was a tough month for high street retailers as sales rose just 0.1%, far below City expectations for a stronger rebound after a torrid Christmas. Economists had forecast a recovery of around 0.5% last month, after the unexpectedly sharp fall of 1.4% in December. The economy will suffer as a result of the weak sales, which come as consumers curb their spending due to inflation pushing up shop prices. The fall in spending has been directly blamed on Brexit, given that the drop in the value of the pond following the EU referendum drove up the cost of importing food and fuel to Britain. Last month, food sales fell again – down 0.9% in volume terms on December – although that was offset by a rise in sales of gym kit and children’s toys.

Better than forecast

Housing market

Britain’s housing market got off to a subdued start in 2018, as the number of sales, new buyers, and properties coming onto the market all fell in January. However, the latest monthly snapshot from the Royal Institution of Chartered Surveyors (RICS) showed that house prices resumed a modest growth trajectory. The survey found national house prices had edged higher, even as agreed sales slipped, with a net balance of +8% of respondents reporting a rise in prices. That was the same reading as seen in December and beat City economists’ forecasts for the barometer to slip to +5%. House prices rose the most in the north west of England, Northern Ireland and Wales, although fell in London, the south-east and the north-east.

And another thing we’ve learned this month … the global economy is showing signs of overheating

There are signs from the US, Britain’s largest single trading partner, of the economy starting to overheat, which could be troubling for ministers as the UK prepares to rely more on US trade after Brexit. Figures from the US job market showed wages rising at the fastest annual rate since 2009, as the American economy created 200,000 new jobs last month – a better performance than had been expected by economists. However, what might on the face of it look like good news was interpreted as a dangerous sign by the financial markets, triggering a massive sell-off as stocks fell at the fastest rate in more than two years. That’s because investors fear stronger pay growth may lead to rising inflation, as companies push-up their prices to offset the impact from rising pay demands. Spiralling inflation could lead the US Federal Reserve to raise interest rates faster than anticipated and could also damage the economy. The UK exports in the region of £100bn of goods and services to the US, almost a fifth of the total sold around the world.