All the promises of a new, bright and prosperous future for Britain outside the EU were dealt a sharp blow this week when the country's central banker revealed the Brexit vote has hit UK growth by as much as 2 per cent.
And it’s British households who are paying the price of that slowdown, Mark Carney, the governor of the Bank of England, told a committee of Members of Parliament.
British families are £900 (Dh4,404) worse off annually than they would have been if the country had voted Remain in the 2016 EU referendum. For ordinary people, that is "a lot of money", Mr Carney said.
“Can’t remember that being written on the side of that red bus,” said Tom Brake, Brexit spokesman for the Remain-backing Liberal Democrats.
Mr Brake was referring to the Vote Leave bus that toured the country during the referendum campaign, emblazoned with a now-infamous pledge that Brexit would result in an extra £350 million a week to spend on the UK’s health service. The slogan has attracted considerable criticism for misusing official figures to promote the benefits of Brexit.
Boris Johnson, who has repeatedly defended the bus battle cry, hit back at Mr Carney's claims this week, insisting it's "absolutely not the case that Brexit has damaged the interests of this country". Speaking to reporters during a trip to Argentina, the Foreign Secretary painted a rosy picture of the UK's future outside the EU, saying that he wants a "Brexit plane" to travel the world and drum up trade deals.
Official data, however, lends more support to the central bank chief's bearish view on the state of the UK economy. In April, figures from the Office for National Statistics showed Britain's economy almost flatlined in the first three months of 2018, growing by 0.1 per cent. The reading was the weakest in more than five years, and was also below the 0.3 per cent growth expected by most analysts.
While chancellor Philip Hammond tried to blame the sluggish growth on unseasonably cold weather during the period, the ONS said the weather front dubbed “Beast from the East” was only a small contributing factor.
A fall in household spending, together with business uncertainty as Brexit looms, all played a part, economists say. Although the economy avoided a recession in the immediate aftermath of the vote to leave, it has grown at a slow place. In fact, Britain is now the slowest-growing economy in the G7 group of advanced nations, a stark change from being the fastest on the eve of the Brexit vote.
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It has also underperformed the central bank’s forecasts from before the referendum, Mr Carney said this week, pinning the blame on the Brexit vote, which led to a collapse in the value of the pound and a slowdown in business investment. “If you look at where the economy is today, relative to that forecast, it’s more than 1 per cent below where it was despite very large stimulus provided by the Bank of England, a fiscal easing by the government and global and European economies, which are much, much stronger than they were previously,” he said.
Real household incomes, he said, were about £900 per household lower than was forecast in May of 2016.
“Hurrah I can hardly wait, at least I’ll have a blue passport,” read one tweet following Mr Carney’s comments.
Faced with the unexpectedly weak first quarter, the Bank of England chose to hold fire on raising interest rates in May, despite earlier guidance that it could.
The bank also announced at its May meeting that it had slashed its forecast for UK economic growth in 2018 to just 1.4 per cent, down from the 1.8 per cent it expected three months earlier.
A number of economists followed suit, slashing their growth forecasts for the rest of this year as concerns mount that the weakness in the first quarter may persist. "The performance of the economy so far this year is certainly disappointing and probably can't be put down entirely to the bad weather," Howard Archer, chief economic adviser to the EY ITEM Club, tells The National. "The weakness of the figures in the first quarter has fuelled concerns that there is an underlying slowdown."
Mr Archer recently cut his forecasts for full-year GDP growth from 1.7 per cent to 1.4 per cent, in line with what the central bank is expecting.
That’s partly due to the first quarter being significantly worse than expected and also because the “survey evidence for April is pretty lacklustre – it certainly doesn’t seem there was a major bounce-back in the economy in April, which you’d have hoped for after the big hit to activity in March”, he says. It’s not all doom and gloom, however. The squeeze on consumers, caused by rising prices and sluggish wage growth, has started to ease as inflation tails off.
UK inflation fell to a 13-month low of 2.4 per cent in April, the ONS announced this week, compared with a high of 3.1 per cent in November. Wages have also edged up in recent months, helping to alleviate the strain on household finances.
For Britain's long-suffering retailers, this should provide a welcome boost, although economists warned rising oil prices could cause inflation to rise in the short term. Much will also depend on how Brexit negotiations pan out over the coming months. In March, there was a breakthrough in the talks as both sides agreed on terms for a transition period after Britain officially leaves next year.
The announcement sent the pound soaring to a three-week high against the dollar, to $1.4088, although it has since pulled back to $1.33.
But while businesses welcomed the announcement, they also expressed concern the transition agreement would not be legally binding until the final withdrawal treaty is signed early next year. As Michel Barnier, the EU's chief Brexit negotiator, likes to remind his counterparts in the UK: "Nothing is agreed until everything is agreed."
For Mr Carney, this transition period, which keeps Britain in the single market and customs union for 21 months after March 2019, is imperative to avoid a further blow to economic growth.
“If the implementation agreement doesn’t come to pass for whatever reason, there would be a potentially considerable real economy adjustment,” he warned MPs. Furthermore, there is still no clarity on the final deal, with the Cabinet divided on what sort of customs arrangement it wants after Brexit.
“Companies are still concerned about the lack of clarity on the long-term relationship between the UK and the EU, for example with all the discussions going on at the moment about the customs arrangement,” Mr Archer says. “You would hope that the fact it looks like a Brexit transition is going to happen would give some support to business investment, but there’s still a lot of uncertainty… so I think that will limit the upside for investment.”
While this uncertainty persists, companies will continue to enact their "contingency plans" for Brexit, says Miles Celic, chief executive officer of financial lobby firm TheCityUK. "Recent positive developments, such as the approval of a transition period as part of the withdrawal agreement, will have eased some of the pressure to pursue these plans at pace – but further certainty is still required," Mr Celic tells The National.
A large number of banks, insurers and asset managers have already announced plans to move staff and operations from London to mainland Europe in order to prepare for a worst-case scenario in which no deal is reached. These include insurance specialist Lloyd’s of London, asset manager Standard Life and Wall Street giants such as Goldman Sachs, JPMorgan Chase and Morgan Stanley, who are on a hiring spree in Frankfurt.
Non-financial companies are also using 2018 to firm up their plans for life after Brexit. One example is Unilever, the Anglo-Dutch consumer goods giant which announced in March that it is abandoning its London headquarters in favour of the Netherlands.
“There are still many critical issues which need to be addressed before we reach the Brexit finish line,” Mr Celic says. “Until there is certainty on the final shape of the deal, [businesses] will take action to ensure that they can continue to serve customers on and after March 29 next year.”
Mr Archer argued that the loss of City jobs, or “Brexodus”, has so far not been as bad as predicted. “Most surveys so far have been scaling down the number of jobs expected to be lost in the City compared to what people were expecting,” he says. “I think in the near term, we’ll probably see a ‘drip drip’ of some jobs being lost, but I don’t think it’s been as bad as feared so far.”
But, again, this depends very much on how Brexit talks go, and should a large scale ‘Brexodus’ take place, economists agree it would be very negative for economic growth.
“Given the importance of the City and financial services to the UK economy, [the loss of jobs] would obviously be bad news,” Mr Archer says.
“It would be wrong to be complacent about it… it’s something that needs to be kept an eye on and hopefully it can be averted, but that will depend on how negotiations over Brexit pan out over the coming months.”