David Blanchflower

Professor of economics at Dartmouth College, New Hampshire, and former member of the Bank of England’s monetary policy committee (MPC) from June 2006 to May 2009

On 27 November 2016 Michael Gove MP sent me a tweet saying that I had been “consistently mugged by reality”.

I don’t think so. It is true that the data post the 23 June vote have perhaps been a little better than I had feared. In large part that was because the Bank of England acted, cutting rates and restarting the asset purchase programme. Also it takes a while for bad news to have a measured impact in the published data. Business confidence is low and there is evidence that optimism is falling among businesses and consumers. My suspicion is that the news is not going to get better.

The consumer has held up pretty well and still seems to be spending and GDP growth at 0.5% is not to be sneezed at. But the fall in the pound and the steady rise in inflation because of the rise in import prices was always going to have an impact. Businesses continue to report that they are becoming reluctant to spend. Business investment is down 1.6% on a year earlier. Inflation hit a two-year high. The price paid by manufacturers for fuel and materials was up 12.9% on the year which suggests there are more price rises in the pipeline.

I was struck by the news from two firms this last week that may be instructive. First Smiffys, the fancy dress maker, located in Lincolnshire decided to move to Amsterdam because of the uncertainties over Brexit. Second Rivington Biscuits, the maker of Pink Panther wafers, went into administration, blaming the fall in the value of the pound following the Brexit vote. The company, based in Wigan, which voted to leave the EU by nearly 64% said it will cut 99 of its 123 staff, as a result. The hope is that this will not turn into a flood.

The labour market does seem to have started to turn down and employers seem to have become more nervous about hiring. In the latest data release employment was down; unemployment was up; the claimant count was up; the number who were in part-time jobs but wanted full-time jobs was up. Plus there was a big fall in the number of full-time jobs. To this point wage growth has held up but shows no likelihood of getting anywhere near the 3.75% wage growth the MPC has predicted would soon happen at every one of its forecasts over the past three years. It never has and won’t.

Rising inflation will lower real wage growth. Despite the recent rise due to low inflation real wages are still 7% lower than they were at the start of the recession. Reality hurts, Michael.

Andrew Sentance

Senior economic adviser at the consultancy PwC and former member of the Bank’s MPC from October 2006 to May 2011

The pattern of recent economic indicators suggests that the UK economy continued to grow in the fourth quarter at a similar rate to the third quarter, when GDP rose by 0.5%. Indicators of consumer spending remain strong, with retail sales up 6.5% in volume terms in October and November compared with a year ago. Internet sales are particularly buoyant, up by around 25% in value terms on a year ago.

Meanwhile, the services sector PMI (purchasing managers’ index) hit a 10-month high in November. Private sector services account for over 60% of UK GDP – so this is a very positive indicator for the economy as a whole.

But if we dig down further into the economic data, there is a much more mixed picture. Employment has levelled out after a period of strong growth. Full-time employment has dropped back slightly while part-time jobs are still increasing. Business investment is about 1.5% down on a year ago so far this year. In the previous five years, business capital spending had grown by around 5% a year, so this is a big shift.

Near-zero inflation has provided a powerful boost to consumer spending over the past couple of years, widening the positive gap between wage growth and price increases. That gap is now narrowing, with inflation up to 1.2%, and set to rise further in the new year as the impact of a weak pound comes through the prices pipeline. Inflation close to 3% at the end of 2017 is still on the cards.

All this is still consistent with slower growth next year – driven by weaker investment and employment and a squeeze on consumer spending because of rising inflation. We should not be surprised that it is taking time for these economic effects to feed through after the Brexit vote in June, which is still less than six months ago.

The extent of the UK slowdown next year will not just depend on what happens domestically, however. It also hinges on broader global prospects. Our economy is very open to international trade and the UK’s two biggest overseas markets are the rest of the EU and the US, which together account for nearly two-thirds of exports. Growth in the rest of the EU has been improving in recent years, and European unemployment continues to fall. Meanwhile, the US is forecast to be the strongest growing G7 economy next year, and could be boosted by fiscal stimulus from the incoming Trump administration.

Current forecasts suggest that Europe and the US will continue to grow reasonably well in 2017, which will help temper the UK slowdown. Next year may not be so bad for the UK after all, but we will need a reasonably healthy global economy to keep us moving forward.