The spectre of Brexit loomed large over the Bank of England’s latest economic update.
Commentators have been quick to blame signs of a slowdown on nervousness ahead of the referendum. The timing might be convenient but the facts suggest there’s much more going on.
The UK economy is slowing, there’s little doubt about that. Growth was just 0.4 per cent in the first three months of this year, down from a sprightly 0.6 per cent the previous quarter.
Business confidence is lower and employment growth has throttled back. All the signs are that the second quarter should be a little weaker still, with the Bank of England’s most recent estimates suggesting growth is likely to be around 0.3 per cent.
So how much of this is due to the uncertainty over the referendum? Let’s start with our industries.
The production sector shrank slightly last quarter so it was services that provided all the growth. Can we blame the fall in production on the uncertainty generated by the referendum? Not really.
Production had started falling the previous quarter, fully five months before we knew the date of the EU vote.
It’s not just a UK phenomenon either. In the US confidence in the manufacturing sector is substantially below that of the services sector, just like here. Industries across the globe are being driven by the same forces, but the economic performance of our trading partners trumps domestic political events.
The slowdown in employment growth is something that has caught the Bank of England’s attention. Twelve months ago the south-east, south-west and east of England were driving very healthy rates of job growth. Yet in the last three months they failed to generate any increase in employment.
What’s going on? What links these three regions is that they all have unemployment of below 4 per cent. Their slowdown in employment growth shows how very high rates of job growth are hard to maintain when you’ve pushed unemployment that low.
Scotland was generating jobs 12 months ago too, yet today we’re seeing unemployment start to creep up. That’s mainly due to the slowdown in oil and gas and the many industries that supply it. The governor of the Bank of England, Mark Carney, referred to the EU vote as the biggest risk facing the UK economy, but it isn’t the only story.
The roots of the current slowdown are much more deeply entwined with international developments and with our own failure to generate productivity growth. We shouldn’t lose sight of those issues even with the referendum now in sight.
• Sebastian Burnside is senior economist at Royal Bank of Scotland