Sterling rebounds after no-deal Brexit worries
Failure to break the Westminster deadlock over Brexit has weighed on sterling over the past month, as fears mount over a potential no-deal departure with damaging consequences for the British economy. However, there was a rebound on Tuesday, on mounting hopes of an extension to the 29 March deadline or a soft Brexit. Analysts say the pound could rise by as much as 10% if a no-deal Brexit is averted, but that it could also fall by a similar amount if Britain crashes out . The pound/dollar rate remains about 11% below its position on the eve of the Brexit vote.
Global stocks recover on US-China trade hopes
Financial markets around the world have rallied strongly over the past month, buoyed by hopes of a deal being struck between the US and China to avoid a further escalation of the trade dispute between Washington and Beijing. Central banks, including the US Federal Reserve, have sounded a more cautious note over raising borrowing costs – adding to the optimism for the world economy and supporting company profits, in a positive development for the stock market. Over the month, the FTSE 100 has risen by almost 400 points and currently stands at about 7,100.
Better than forecast
Energy price cap forces down inflation
The biggest monthly fall in gas prices since the 1980s – coming after the introduction of the government’s energy price cap – helped drag down inflation to 1.8% last month from a rate of 2.1% in December, offering hard-pressed consumers some respite ahead of Brexit. Inflation peaked at a five-year high of 3.1% in November 2017 after the rapid fall in the value of the pound following the Brexit vote. Although it has steadily fallen in recent months, economists warn a sudden drop in sterling sparked by Britain crashing out of the EU would drive inflation higher again, eroding household finances.
Worse than forecast
Fears mount over post-Brexit trade deals
Ministers have privately begun admitting to business leaders that several post-Brexit trade deals with major economies, including Japan and South Korea, won’t be done in time for the 29 March deadline, in a development that has alarmed business groups. Britain’s trade deficit – the gap between sales of UK goods and services abroad and purchases from overseas at home – narrowed slightly in December, although not by as much as expected. Trade in cars in particular has had a large impact, with falling exports amid rising global trade tensions and weaker consumer demand in China and the eurozone.
Worse than forecast
Business activity stalls amid Brexit uncertainty
Heightened uncertainty over Brexit appears to have dragged the economy close to stalling point in the first month of the year. Surveys of business activity closely watched by the Bank of England and the Treasury for early warning signs from the economy showed that companies have increasingly put spending decisions on hold. Although stockpiling has helped to prop up manufacturers, growth in new orders has slumped, with firms blaming Brexit and the slowing global economy. The IHS Markit/Cips all-sector purchasing managers’ index – which includes manufacturing, construction and services – fell from 51.5 to 50.3 last month – the second lowest reading since December 2012, and only just above the 50.0 mark that separates growth from recession.
Better than forecast
Record jobs vacancies drive up wage growth
Record numbers of unfilled job vacancies across Britain appear to have strengthened the bargaining power of workers to demand higher wages, despite mounting concern among business leaders over the growing skills shortages. The number of vacancies in the British jobs market rose by 16,000 to an estimated 870,000 in the three months to January, with unemployment at the lowest levels since the mid 1970s. Average weekly earnings have slowly begun to rise, although wages still remain below the pre-financial crisis peak. Although the jobs market provides one ray of light for the economy ahead of the Brexit deadline, economists warn the uncertainty could hit jobs in the near future.
Better than forecast
January sales drive consumer spending rebound
Discounts in the January sales helped tempt British consumers back to the high street last month, as sales volumes rose by 1% compared with December, in a sharp rebound from one of the worst festive Christmas shopping periods of the past decade. The data will come as a rare positive for the economy ahead of Brexit, suggesting that shoppers have tuned out from the political chaos. Some surveys have, however, warned that consumers are putting bigger-ticket spending decisions on hold as Brexit looms. City economists have also warned that uncertainty over Britain’s departure will be likely to keep a lid on sales over coming months.
Better than forecast
Record January budget surplus boosts Hammond
Philip Hammond was handed a boost from the public finances ahead of next month’s spring statement, receiving the biggest surplus for the government’s coffers in January since records began in 1993. Government income from taxes outstripped public spending by £14.9bn, after self-assessment income tax and capital gains tax receipts were stronger than expected. While January is usually a month when the public finances are in surplus, given seasonal differences in receipts, the surplus was £5.5bn larger than a year ago. Although Hammond appears on track to hit his deficit reduction targets, economists warn a no-deal Brexit would blow apart the progress he has made.
Worse than forecast
Worst outlook for house prices since 2011
Brexit uncertainty and stretched levels of affordability are continuing to stifle the UK housing market, making estate agents the gloomiest they have been in a decade over property values. Figures from the Office for National Statistics show that house price growth slowed to 2.5% in the year to December, dragged down by the London market where prices are falling. The Royal Institution of Chartered Surveyors’ monthly house price balance – which measures the difference between the number of estate agents and property surveyors anticipating increases and those expecting decreases – dropped to -22% in January, the lowest level since March 2009.
And another thing we’ve learned this month …
UK growth has fallen behind since the Brexit vote
While the gloomiest of economic forecasts made ahead of the EU referendum in 2016 might not have come to pass, increasing evidence has emerged of the gradual damage the vote unleashed for the economy. This month, a member of the Bank of England’s monetary policy committee, Gertjan Vlieghe, put the cost at £40bn a year of lost GDP growth compared to a vote to remain two-and-a-half years ago. That’s about £800m a week, he said, which is more than double what the leave campaign claimed could be saved on EU membership fees and instead spent on the NHS. Since the referendum, the UK’s economic growth has slowed while the rest of the world has recorded one of its strongest periods for growth of the past decade – with a particular deterioration in business investment, as major companies put their spending decisions on hold amid the uncertainty over Britain’s future.
