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After ten months the Brexit economic honeymoon is over

Written by Martin Upton

Tuesday 18th April 2017

Those forecasting an economic catastrophe in the wake of the Brexit vote in last June’s referendum may have spent much of the past year reflecting on whether they called it right – with retail sales surging, the FTSE-100 hitting a record high and unemployment falling to its lowest rate since 2005. But news and data published in recent weeks is now indicating that a more sombre economic environment is starting to envelop the UK.
 
The key concern is the increase in price inflation. The Consumer Price Index (CPI) rate of inflation now stands at 2.3% and could rise above 3% in the coming months. The Retail Prices Index (RPI) rate of inflation is higher, at 3.1% - bad news for those with student loans where the interest rate is linked to RPI. Those with long memories may view price inflation at this level as hardly cataclysmic. The issue though is that, at 2.3%, average earnings in the UK are only just about keeping pace with CPI price inflation, with the result that real earnings have stopped growing. 
 
And the prospect is that real earnings are likely to fall in the coming months with price inflation on an upward course. Such a situation is not really unexpected – the fall in the value of the pound following the Brexit vote has inevitably pushed up import prices. A reversal in the fall in oil prices from its low point in 2014 is also adding to upward pressure on price inflation.
 
The upshot of this slump in real earnings – which grew solidly in 2015 and 2016 – is that consumers will curtail their spending with retail sales volumes suffering. Given that growth in the UK economy has been fuelled by healthy retail sales in the past two years this prospect is worrying. 
 
Weakening consumer confidence could also impact on the housing market where the most recent surveys show an easing in the rate of house price inflation. The Nationwide’s most recent survey showed that average house prices fell by 0.3% in March taking the annual rate of house price inflation down to 3.5%. After years of stellar price growth property prices in London now seem at risk of a downside move as overseas buyers hold back and wait to see what Brexit holds for the City and the London economy.
 
On a, perhaps, more positive note interest rates seem set to remain at their historic low – although this is hardly good news for beleaguered savers. Despite rising price inflation, that already sees the CPI inflation rate above its 2% target rate, the Bank of England’s Monetary Policy Committee (MPC) will set Bank Rate on the basis of the medium term prospects for price inflation as opposed to its current level. It is likely that the MPC will look forward to price inflation edging lower in 2018 and 2019 after its current upswing. Add on low earnings growth, a weakening housing market and the prospect of easing consumer spending and the MPC is unlikely to form the view that now is the time to tighten UK monetary policy.
 
*Martin Upton is Director of True Potential PUFin
 
              

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