Andrew Sentance
Senior economic adviser at the PwC consultancy and member of the Bank’s MPC from October 2006 to May 2011
There are two big themes which stand out from this month’s data, and they show the UK being pulled in opposite directions by the global economy and consumer spending.
On the global front, there has continued to be good news. The three main engines of the world economy – North America, Europe and Asia – continue to be supportive of growth. The IMF is forecasting the best couple of years for global growth in 2017-18 since 2011-12. This is backed up by one of my favourite economic indicators – international air travel. Airlines reported an annual increase of nearly 9% in air traffic in January, followed by 8.6% in February – once account is taken of the leap year in 2016. These are strong figures by historical standards – compared with trend growth of 5-6%.
This positive picture from the global economy is backed up by the latest CBI survey of manufacturing industry, which shows a very strong picture for exports. The UK is a very international economy and so these positive global trends will be supportive of growth.
However, on the consumer side of the economy, the indicators point in the opposite direction. Retail sales volumes fell by 1.4% in the first quarter of this year (compared to the previous quarter). That is the second biggest quarterly fall reported since the mid-1990s. The underlying drivers of consumer spending also look soft. Employment rose by just 30,000 – less than 0.1% – over the past six months as both labour demand and supply weakened. There has been a significant drop in the number of EU workers in the UK and the number of over-65s at work has also fallen.
Meanwhile, rising inflation has squeezed the growth of real wages. Inflation has caught up with wage growth and will probably overtake it in the months ahead. So both of the main components which add to rising consumer purchasing power in the UK – employment and real wages – are slowing sharply.
The most recent data for public finances backs up this picture of a slowing consumer economy. VAT receipts in the first quarter of this year were 1% down in money terms on a year ago.
UK consumers contribute twice as much to the demand for goods and services in our economy than exports. So we should expect the consumer slowdown to dominate the growth picture over the course of this year. But strong export performance will be a significant offsetting factor, as long as the world economy remains resilient.
The GDP growth figures for the first quarter released at the end of this week are likely to confirm that the UK economy is already slowing. After a quarterly rise of 0.7% in the final three months of last year, I would expect growth of 0.3-0.4% in the first quarter. Not a disaster, but a very marked slowdown.
David Blanchflower
Professor of economics at Dartmouth College, New Hampshire, and member of the Bank’s MPC from June 2006 to May 2009
The first stage vote in the French presidential election gave us a sense of the size of the impact on the markets of a Brexit vote in reverse. Markets had largely expected the globalist Emmanuel Macron and the far-right nationalist Marine Le Pen would be headed to the second round, but the results were not fully priced in. In response to the news, the French stock market, the CAC index, was up 4.1% the next day with the banks Société Générale, Crédit Agricole and BNP Paribas among the biggest risers. Peugeot the car maker was also up sharply. The FTSE 100 was up and so was the German Dax. The markets would inevitably have been down a lot if the next round had been Le Pen and the far-left candidate Jean-Luc Mélenchon. This is an indicator of the scale of what could happen in UK markets if there is a disorderly Brexit disaster. It would likely result in a cataclysmic global fall in markets. Be warned if Le Pen wins the second round, which looks unlikely.
Support for Brexit is likely to be driven by how the economy performs and whether living standards hold up and they aren’t. Last week, Markit’s Household Finance Index (pdf) indicated that wage growth had slowed, and inflation had risen to a three year high of 2.3%. But consumer demand was holding up, driven by higher borrowing and dissaving, but this couldn’t last for long. The saving ratio has reached the lowest since records began in 1963 and the only way is up. In uncertain times people should be saving as a precaution not going on a spending spree. Two days later, the Office for National Statistics released the latest retail sales numbers which missed expectations in March.
There isn’t much other good news. Life expectancy at age 65 in the UK fell over the last three years for men and women. Employment fell in December 2016-February 2017 versus November 2016 -January 2017 by 13,000. The latest trade figures showed Britain’s deficit for goods and services trade widened in February as exports fell and imports rose.
I am hoping for some good economic news next month. I didn’t see much of any this month.
