On 23 May 2016, HM Treasury said that “a vote to leave [the European Union (EU)] would represent an immediate and profound shock to our economy”.
In the two years following such a vote we would experience recession and unemployment would be around 500,000 higher than if we had voted to remain. House prices, wages and sterling would fall. On the upside, we would be spared plague, famine and pestilence.
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A month later, the UK voted to leave the EU. With one exception, the worst predictions have not come to pass. The economy has grown, albeit at a slowing pace. Employment has risen to record levels. The unemployment rate is lower than at any time since the Ford Cortina was Britain’s best-selling car.
The exception is that the value of sterling has fallen by 12 per cent since referendum day. In addition, the interest rate on UK government debt and the share prices of firms that serve mainly the UK market have fallen, both signs that growth is expected to slow. Investors have made their decision: Brexit will be bad for the UK’s long-term economic prospects.
However, the depreciation of the pound has delivered more immediate effects. By January 2017, the input costs of Britain’s manufacturers were rising at an annual rate of 20 per cent. Rapid input cost growth quickly fed into consumer prices. From 0.5 per cent in June last year inflation had risen to 2.9 per cent by May. At the same time, wage growth was slowing. On the most recent numbers pay rose by just 1.7 per cent year-on-year.
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Consequently, the average Briton’s spending power has been squeezed hard. Initially, consumers performed a Wile E Coyote act. Retail sales growth was strong towards the end of last year, underpinned by rising employment and a return to the intensive use of credit cards, with that type of debt now up 10 per cent on a year ago. Since then, consumer confidence has weakened and the amount purchased on the high street and online has fallen in three of the last five months.
The pressure on consumers was evident in the gross domestic product data for the first quarter of the year. At 0.2 per cent, overall growth was materially slower than in the last three months of 2016. That slowdown was especially evident in consumer-facing sectors. Output fell in retailing, accommodation and entertainment as pressure on disposable incomes led people to curb discretionary spending.
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Consumption growth will continue to weaken as price inflation looks set to outstrip wage rises well into 2018. With consumers’ spending accounting for almost £2 in every £3 of national income, the other elements of demand – investment, government and trade – will have to do prodigious amounts of heavy lifting to offset the drag from consumption.
There were tentative signs of a pick-up in investment in the first quarter and emerging capacity constraints in some sectors may herald further growth. Exports fell in the first three months of the year and imports rose, the net effect being to subtract from gross domestic product. That position could reverse as exporters begin to benefit from a weaker pound and a modest rise in demand in the euro area, and imports fall in line with domestic consumption.
But it would take the triumph of hope over data already in the pipeline for growth in 2017-18 to be anything other than lower than in recent years.
Plainly, the economic roof did not fall in when 52 per cent of us voted to leave. But there has been a costly phoney war in which sterling’s decline has been the leading combatant, leaving us worse off than we would otherwise have been.
Of course, the real action lies ahead. Economics and economists have rightly been pilloried when they have staked out partisan positions that go beyond what we can reasonably know about how Brexit will affect our prospects. Nevertheless, the determinants of the ultimate economic consequences of leaving the EU are not in the least controversial.
Trade, international investment flows and in-migration make us better off, on average, than we would otherwise have been. If the settlement we reach with the EU and the rest of the world maintains or enhances these flows, we will be better off in future than we would have been. If not, we won’t.
• Stephen Boyle is chief economist at Royal Bank of Scotland