Since the Brexit vote ten months ago, there have been many reports about the state of the UK economy and its prospects for the future. In an ideal world, we could look at the recently-published data and decide how we are doing. Unfortunately, the picture is unclear with different data sets indicating different things.
On the positive side, unemployment has fallen to 4.7% and employment has risen to almost 75%, both numbers reaching impressive lows and highs respectively. What we would also expect to see simultaneously is an acceleration in wage increases as workers take advantage of a tighter labour market indicated by low unemployment, high activity rates and employers reporting recruitment difficulties, with the effect magnified by an increasing number of migrant workers returning home because of the fall in their incomes when exchanged into their own currency due to the fall in sterling since June. However, money wages are rising at only 2.3%pa and, as inflation increases, real wages will fall. Possible explanations for the low average increase in wages are the 1% cap on public sector pay increases thereby reducing the average, a possible increase in retired workers returning to the labour force depressing wages and the increase in self-employment since the self-employed are not counted in the data.
Other positives for the economy are our growth rate, the reduction in government borrowing and improvement in the balance of payments. Our annual GDP growth of 1.8% has been the second highest in the G7 behind only Germany at 1.9%. However there is concern that consumer spending, which has been an important contributor to the UK’s growth, is now slowing. Further factors which might impact on consumer spending are the expected fall in real income, mentioned above, and the slowdown in the housing market which, according to the Halifax, grew at its slowest rate for four years. The housing market is important for an economy in terms of the wealth effect, its impact on consumer confidence and the effect it has on related markets, such as carpets, furniture and household appliances, which people buy when they move.
The slowdown in consumption growth, and therefore probably GDP growth, is such that the Bank of England is now thinking that the increase in interest rates which has been talked about for some time, is likely to be postponed from late 2018 until the middle of 2019. It will then be almost twelve years since the last increase in UK interest rates which took place in July 2007 when they were increased from 5.5% to 5.75%.
The Public Sector Borrowing Requirement (PSBR) has come in below expectations and is now back to levels experienced before the financial crisis. This is largely due to income and corporation tax revenues being greater than predicted. However, if the economy slows down in the run-up to Brexit, tax revenues will fall and benefit payments increase, increasing the PSBR.
The current account deficit dropped from 5.3% to 2.3% of GDP in the last three months of 2016. Unfortunately this proved to be a temporary improvement and the deficit has widened again this year. This makes it clear that devaluation alone will not be sufficient to improve our balance of payments and significant structural changes will also be necessary to improve the attractiveness of UK products. (Consider Germany which has a current account surplus equivalent to 8.7% of GDP not because of cheap goods but because of high quality, well-designed products). FDI increased in the last quarter of 2016 but a worrying development are recent surveys which have found that the UK has fallen in attractiveness as an overseas country in which to set up compared to other countries.
On the positive side, we could be in Greece where unemployment is 23%, and average wages have fallen approximately 10%, income tax has been increased from 40% to 47%, the retirement age has been increased from 60 to 67 and pensions have been cut 14 times compared to 2009.