Weaker demand, slower growth, faster inflation — that’s the UK economy that the Bank of England sees in its crystal ball after the nation voted for Brexit. Now the first hard numbers are on the way.
So far, surveys and estimates have mostly — though not comprehensively — shown that the June 23 decision to quit the European Union has prompted a downturn. The Office for National Statistics will this week publish figures giving more solid clues as to whether that’s the case.
If the National Institute of Economic and Social Research is right, weakness should start to appear pretty quickly. The London-based think tank estimates the economy shrank at the start of the third quarter, contracting about 0.2% in July alone. The BoE cut its economic forecasts by the most ever on August 4, though economists say this week’s releases won’t show a dramatic deterioration just yet.
At Investec, Victoria Clarke and Chris Hare said that the figures will show “relatively modest post-Brexit referendum effects,” with significant changes coming further down the line. For now, they expect early hints of upward price momentum and signs of a negative impact creeping into the labour market and public finances data.
The most marked and sustained impact of Brexit on markets was the exchange rate, and that’s a worry for an inflation-targeting central bank like the BoE. Releases tomorrow will provide an insight into how fast the pound’s 12% decline on a trade-weighted basis is driving up consumer prices. Over the medium term, the BoE expects weaker sterling will push price growth back to its 2% target at a faster pace than previously envisaged.
While economists see the headline inflation rate staying at 0.5% in July, prices of products from cars to phones have already started creeping higher as firms pay more for imports. Producer-price figures released the same day may show any early impact on companies’ costs.
On Wednesday, the ONS will release labour-market data. Jobless claims figures will cover July, though the more detailed ILO report — on key metrics such as employment and wage growth — will be for the April-June period. The BoE forecasts unemployment will rise to 5.5% at the end of next year from 4.9% currently.
A faltering job market combined with an upswing in prices could hit a crucial part of the economy: domestic spending. That key driver of growth has so far proved resilient. Even with consumer confidence dropping, the British Retail Consortium said that retail sales rose the most in five months in July.
But those figures were helped by discounting, and by food and drink sales as the British summer finally got under way. The ONS will give its take on Thursday with July retail-sales numbers that are forecast to show stagnation. June saw a 0.9% drop, the most this year, and a BoE survey showed household spending was starting to wane even prior to the EU vote.
The week ends with the latest snapshot of the public finances. We’re four months into the fiscal year, and new Chancellor of the Exchequer Philip Hammond is dropping heavy hints that government stimulus is on the way to back up the BoE’s monetary easing.
He’s already abandoned his predecessor George Osborne’s plan to deliver a budget surplus by 2020 and vowed to do whatever is necessary in his year-end Autumn Statement “to keep the economy on track.”
July is usually a good month for the public finances, with the Treasury receiving higher-than-normal receipts of income tax and Corp tax. Economists predict a budget surplus of £1.9bn ($2.5bn), up from £1.2bn in July 2015.
But Brexit will likely take its toll before long. According to independent forecasts compiled by the Treasury last month, the deficit will total £129bn between April 2016 and March 2018, a third more than officials predicted in March.
The BoE said this month that if the UK economy develops as weakly as it predicts, policy makers will probably cut their benchmark interest rate again. We’ll see.