David Blanchflower
Professor of economics at Dartmouth College in the US, and member of the Bank of England’s monetary policy committee from 2006 to 2009
There is bad news all around. I couldn’t find much if any good news: the best I could find was that inflation didn’t rise. The forecasts for the UK economy are horrible and most economists are broadly in agreement that Brexit will cause lasting damage.
The Office for Budget Responsibility forecast GDP growth for the next five years of around 1.5% a year. The European commission forecast that in 2019 the UK, along with Italy, will be the slowest growing country in the EU28 with a growth rate of 1.2%. In 2020 the commission forecasts that with a growth rate of 1.2% again, Britain will be the slowest grower in the EU – assuming it hasn’t left. The IMF has forecast growth for the UK of 1.4% in 2018 and 1.5% in 2019. All of this could be much worse if there is no sensible Brexit deal.
As the Bank of England has made clear, Brexit represents the biggest downside risk to the UK economy. At the same time the OECD has warned that a looming global trade war risks a further growth slowdown.
Not surprisingly sterling took a beating as the Tory party continued to fight among themselves and ministers quit. RBC Capital markets suggest that the best and worst-case scenarios for Brexit could spark a 10% swing in the currency.
The labour market is showing signs of slowing. Unemployment rose by 20,000 and employment remained flat, so the unemployment rate rose from 4.1% to 4.2%. Wage growth – measured by single month changes in average weekly earnings for pay including bonuses, which is how every country in the world except Britain measures wage growth – continued to slow. It grew by 3.3% in July 2018; 3.1% in August and 2.8% in September. Contrary to what Andy Haldane, chief economist at the Bank, has claimed, there is no compelling evidence of a new dawn breaking for pay growth. Living standards aren’t improving.
There are other worrying signs, not least from business investment, which continues to slip. The huge amounts of uncertainty mean that firms will look elsewhere to invest and at the very least put plans in the UK on hold. How can you calculate a rate of return with this amount of uncertainty over where the economy will be in five years time? Retail sales are weak and the housing market is stalling. Maybe there will be good news next month – l can’t imagine what it would be!
Andrew Sentance
Independent business economist, and member of the MPC from 2006 to 2011
Political developments, rather than the state of the economy, have been the key issue on the Brexit front over the past month. The release of the draft Brexit deal has highlighted potential opposition both within the Conservative party and across parliament. Sterling has weakened, and the stock market has been volatile.
The uncertainty about Brexit, which has been a dampener on business investment and economic growth for the past couple of years, seems unlikely to be quickly resolved. Even in Theresa May’s deal can be concluded and approved by the UK parliament, the nature of the future relationship between the UK and the EU will remain uncertain into the 2020s. We should not. therefore, expect a quick rebound in UK economic growth in 2019 and 2020.
The short-term indicators remain mixed. GDP rose by 0.6% in the third quarter – but it may have received a strong boost from good weather, which supported activity in services industries. We should expect more subdued growth, perhaps around 0.2 to 0.3% quarterly increase, in the fourth quarter. Wage growth has continued to strengthen and inflation has fallen back slightly. That is good news for consumer spending, which has been one of the main drivers of recent UK economic growth.
The recent fall in the oil price also provides a mixed blessing for the UK economy. It will help consumers as it feeds through into lower petrol and diesel prices. But if the weaker oil price is a signal that the world economy is starting to grow more slowly, that is not good news for UK exports.
The prospects for the UK economy over the winter months will hinge a great deal on the political progress of Brexit. If May can get her deal through parliament, confidence may recover and some of the current uncertainty may abate. But there is a risk that a much bigger political crisis could develop if the Brexit deal is rejected in parliament. That would trigger a new bout of uncertainty, adversely affecting sterling, consumer spending and business investment.
