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| What cost Brexit? Soon we'll know | What cost Brexit? Soon we'll know |
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| We’ve had all the surveys. There have been forecasts and predictions by the score. Every thinktank, every City analyst, every international body has a view about whether the UK economy is going to drop into recession following the EU referendum on 23 June. Some of them have sophisticated models of the economy to help them, but the truth is nobody really knows. | We’ve had all the surveys. There have been forecasts and predictions by the score. Every thinktank, every City analyst, every international body has a view about whether the UK economy is going to drop into recession following the EU referendum on 23 June. Some of them have sophisticated models of the economy to help them, but the truth is nobody really knows. |
| This week will see the first piece of hard evidence of how the economy has fared in the period after the Brexit vote. Thursday’s retail sales report from the Office for National Statistics will show what happened to spending in the shops and online in July. | This week will see the first piece of hard evidence of how the economy has fared in the period after the Brexit vote. Thursday’s retail sales report from the Office for National Statistics will show what happened to spending in the shops and online in July. |
| The ONS data is eagerly awaited because the survey evidence has been so mixed. Reports from the CBI and the polling company GfK have been downbeat, but those from the British Retail Consortium (BRC) and the Bank of England’s regional agents have been more positive. Interestingly, both the BRC and Threadneedle Street found that consumer behaviour seemed more affected by the weather than it was by the referendum. | |
| If the UK is to steer clear of recession over the coming months, it is important for the tills to keep jangling in the high street. In part, that’s because consumer spending accounts for around two-thirds of national output. But it is also because one of the other big components of GDP – investment – is likely to be weak. By and large, businesses were in favour of remaining in the EU and it may take them some time to get over the shock of the result. The report from the Bank’s agents suggested that investment over the next year will now be lower than it would have been, although not dramatically so. | If the UK is to steer clear of recession over the coming months, it is important for the tills to keep jangling in the high street. In part, that’s because consumer spending accounts for around two-thirds of national output. But it is also because one of the other big components of GDP – investment – is likely to be weak. By and large, businesses were in favour of remaining in the EU and it may take them some time to get over the shock of the result. The report from the Bank’s agents suggested that investment over the next year will now be lower than it would have been, although not dramatically so. |
| Companies will only consider investing if they think demand is going to be strong enough to warrant extra spending on buildings, plant, machinery and training. For those that export, the fall in the value of the pound should help, but the strength of consumer spending will be crucial for those that cater for the domestic UK market. | Companies will only consider investing if they think demand is going to be strong enough to warrant extra spending on buildings, plant, machinery and training. For those that export, the fall in the value of the pound should help, but the strength of consumer spending will be crucial for those that cater for the domestic UK market. |
| There are umpteen factors that affect consumer behaviour, but the two big ones are the state of the labour market and spending power once the mortgage or rent has been paid. Put simply, people will spend less if they think they are about to lose their jobs or if the value of their wages and salaries is being eroded by higher prices or the rising cost of housing. The recession of the 1990s was caused by a combination of these two effects: a doubling of interest rates to 15% led to much higher unemployment and a sharp reduction in disposable income. Consumer spending fell off a cliff. | There are umpteen factors that affect consumer behaviour, but the two big ones are the state of the labour market and spending power once the mortgage or rent has been paid. Put simply, people will spend less if they think they are about to lose their jobs or if the value of their wages and salaries is being eroded by higher prices or the rising cost of housing. The recession of the 1990s was caused by a combination of these two effects: a doubling of interest rates to 15% led to much higher unemployment and a sharp reduction in disposable income. Consumer spending fell off a cliff. |
| The recession of 2008 to 2009 was different from those of the early 1980s or early 1990s. In those episodes, interest rates were raised aggressively to combat rising inflation. Last time round, the trouble was not excess consumer demand, it was a crisis in the financial sector, which led to a global credit crunch. | The recession of 2008 to 2009 was different from those of the early 1980s or early 1990s. In those episodes, interest rates were raised aggressively to combat rising inflation. Last time round, the trouble was not excess consumer demand, it was a crisis in the financial sector, which led to a global credit crunch. |
| In terms of the hit to national output, the last recession was more severe than those of the early 1980s and early 1990s. As such, it was reasonable to assume that unemployment would rise even more sharply than it during those previous downturns. | In terms of the hit to national output, the last recession was more severe than those of the early 1980s and early 1990s. As such, it was reasonable to assume that unemployment would rise even more sharply than it during those previous downturns. |
| But it didn’t. The labour market felt the strain, but the effects came through in different ways: through under-employment, an increase in self-employment and a sharp drop in productivity growth. People were prepared to accept pay cuts or freezes in order to hold on to their jobs. This was far from an ideal outcome, but better than mass unemployment. The problems that those parts of the UK that suffered de-industrialisation in the 1980s still faced is proof of how joblessness leaves deep and permanent scars. | But it didn’t. The labour market felt the strain, but the effects came through in different ways: through under-employment, an increase in self-employment and a sharp drop in productivity growth. People were prepared to accept pay cuts or freezes in order to hold on to their jobs. This was far from an ideal outcome, but better than mass unemployment. The problems that those parts of the UK that suffered de-industrialisation in the 1980s still faced is proof of how joblessness leaves deep and permanent scars. |
| The labour market looked pretty healthy before the referendum. In the three months ending in May, unemployment was at its lowest level since 2005, a year when the economy was booming ahead of the financial crisis. | The labour market looked pretty healthy before the referendum. In the three months ending in May, unemployment was at its lowest level since 2005, a year when the economy was booming ahead of the financial crisis. |
| The percentage of the population in work has not been higher since modern records began in 1971, but wage growth has remained stubbornly weak. Average earnings are rising at just over 2%, well down on the levels seen in the years leading up to the financial crisis. One explanation is that there is more slack in the labour market than the official figures suggest. Another is that the dice are loaded in favour of employers in pay negotiations, and that the part of the economy where trade unions have a significant presence – the public sector – has borne the brunt of austerity. | The percentage of the population in work has not been higher since modern records began in 1971, but wage growth has remained stubbornly weak. Average earnings are rising at just over 2%, well down on the levels seen in the years leading up to the financial crisis. One explanation is that there is more slack in the labour market than the official figures suggest. Another is that the dice are loaded in favour of employers in pay negotiations, and that the part of the economy where trade unions have a significant presence – the public sector – has borne the brunt of austerity. |
| The Resolution Foundation provides a third explanation in its latest earnings outlook. Researcher Laura Gardiner says earnings growth for those people who stayed in the same job fell from 4% to 2% between 2008 and 2010 and has never recovered. By contrast, the average pay rise for those who change jobs has risen steadily since the economy started to recover and stood at 7.5% in 2015. | The Resolution Foundation provides a third explanation in its latest earnings outlook. Researcher Laura Gardiner says earnings growth for those people who stayed in the same job fell from 4% to 2% between 2008 and 2010 and has never recovered. By contrast, the average pay rise for those who change jobs has risen steadily since the economy started to recover and stood at 7.5% in 2015. |
| Gardiner says that previous experience would have led her to expect a “knock-on effect on pay settlements for the ‘static’ workforce, via mechanisms such as firms experiencing resignations raising the pay of those who remain for fear of losing them too.” | Gardiner says that previous experience would have led her to expect a “knock-on effect on pay settlements for the ‘static’ workforce, via mechanisms such as firms experiencing resignations raising the pay of those who remain for fear of losing them too.” |
| There has, though, been little sign of such effects. Gardiner speculates that the reason could be that job mobility is still below its peak, that firms don’t think the stayers need higher pay awards to command their continued loyalty, or that the stayers crave job security in what seems like a tentative recovery. | There has, though, been little sign of such effects. Gardiner speculates that the reason could be that job mobility is still below its peak, that firms don’t think the stayers need higher pay awards to command their continued loyalty, or that the stayers crave job security in what seems like a tentative recovery. |
| Brexit, she says, may further delay any take off in wage growth, and that seems a reasonable assumption. Even if unemployment holds steady at its current levels, it is hard to envisage average earnings rising at much more than their current level. | Brexit, she says, may further delay any take off in wage growth, and that seems a reasonable assumption. Even if unemployment holds steady at its current levels, it is hard to envisage average earnings rising at much more than their current level. |
| This won’t matter much in the short term, because with inflation so low spending power is increasing. The Bank of England’s decision to cut interest rates – and, just as importantly, signal that they will stay low for a prolonged period – means that households have the reassurance that the cost of housing is not going to shoot up. | This won’t matter much in the short term, because with inflation so low spending power is increasing. The Bank of England’s decision to cut interest rates – and, just as importantly, signal that they will stay low for a prolonged period – means that households have the reassurance that the cost of housing is not going to shoot up. |
| The fall in the pound will lead to dearer imports and higher inflation. That will eat into real income growth and is likely to lead to slower consumer spending growth. The process, however, will probably not be immediate and it probably won’t be as dramatic as some fear. Policy stimulus and a willingness to accept low pay awards will support employment, but productivity and living standards will be squeezed. Life for most people will go on in much the same way as it has ever since the financial crisis. | The fall in the pound will lead to dearer imports and higher inflation. That will eat into real income growth and is likely to lead to slower consumer spending growth. The process, however, will probably not be immediate and it probably won’t be as dramatic as some fear. Policy stimulus and a willingness to accept low pay awards will support employment, but productivity and living standards will be squeezed. Life for most people will go on in much the same way as it has ever since the financial crisis. |