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| Brexit vote has cost each household more than £600 a year, says NIESR | Brexit vote has cost each household more than £600 a year, says NIESR |
| (5 days later) | |
| Thinktank says it is ‘almost certain’ leave vote has damaged living standards as it scales back economic growth forecasts | Thinktank says it is ‘almost certain’ leave vote has damaged living standards as it scales back economic growth forecasts |
| Richard Partington Economics correspondent | Richard Partington Economics correspondent |
| Wed 1 Nov 2017 00.01 GMT | Wed 1 Nov 2017 00.01 GMT |
| Last modified on Wed 14 Feb 2018 15.30 GMT | |
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| British households are each more than £600 a year worse off following the vote to leave the European Union, according to one of the UK’s leading economic forecasting bodies. | British households are each more than £600 a year worse off following the vote to leave the European Union, according to one of the UK’s leading economic forecasting bodies. |
| The National Institute of Economic and Social Research (NIESR) said it is “almost certain” the leave vote has damaged living standards and hit the growth potential of the economy. The thinktank also scaled back its expectations for growth in the UK for the next three years. | The National Institute of Economic and Social Research (NIESR) said it is “almost certain” the leave vote has damaged living standards and hit the growth potential of the economy. The thinktank also scaled back its expectations for growth in the UK for the next three years. |
| Against a backdrop of improving economic conditions around the world, the UK is expected to record GDP growth of 1.6% this year, down from NIESR’s previous estimate for growth of 1.7%. In contrast, global GDP is expected to grow by 3.5% this year. | Against a backdrop of improving economic conditions around the world, the UK is expected to record GDP growth of 1.6% this year, down from NIESR’s previous estimate for growth of 1.7%. In contrast, global GDP is expected to grow by 3.5% this year. |
| The NIESR also revised down the forecast for the rate at which the British economy expands to 1.7% in 2018 and 2019, from 1.9% and 2%, while it expects growth in the following years to be weaker than the average rate achieved before the referendum. | The NIESR also revised down the forecast for the rate at which the British economy expands to 1.7% in 2018 and 2019, from 1.9% and 2%, while it expects growth in the following years to be weaker than the average rate achieved before the referendum. |
| The worrying forecasts come as the Bank of England prepares to raise interest rates for the first time in a decade on Thursday, while they are also likely to trouble the chancellor, Philip Hammond, ahead of the budget later this month. | The worrying forecasts come as the Bank of England prepares to raise interest rates for the first time in a decade on Thursday, while they are also likely to trouble the chancellor, Philip Hammond, ahead of the budget later this month. |
| Threadneedle Street is expected to increase the cost of borrowing from 0.25% to 0.5%, reversing the emergency cut immediately after the Brexit vote. | Threadneedle Street is expected to increase the cost of borrowing from 0.25% to 0.5%, reversing the emergency cut immediately after the Brexit vote. |
| The hike comes against a backdrop of rising inflation, driven by the weak pound in the wake of the EU referendum – eroding household living standards at a time when wages are failing to edge significantly higher. The NIESR said inflation will peak at 3.2% in the final three months of this year, before settling at 2% in 2020 as the Bank raises interest rates. It expects the cost of borrowing to rise to 2% by the middle of 2021. | The hike comes against a backdrop of rising inflation, driven by the weak pound in the wake of the EU referendum – eroding household living standards at a time when wages are failing to edge significantly higher. The NIESR said inflation will peak at 3.2% in the final three months of this year, before settling at 2% in 2020 as the Bank raises interest rates. It expects the cost of borrowing to rise to 2% by the middle of 2021. |
| Central to the forecasting body’s downgrade in the growth prospects for the UK economy is a more negative view of labour productivity – which has been a persistent puzzle for economists over the past decade. The efficiency of British workers, as measured by economic output per hour worked, has failed to improve in line with expectations since the financial crisis. | Central to the forecasting body’s downgrade in the growth prospects for the UK economy is a more negative view of labour productivity – which has been a persistent puzzle for economists over the past decade. The efficiency of British workers, as measured by economic output per hour worked, has failed to improve in line with expectations since the financial crisis. |
| According to NIESR, Brexit could make matters worse, with businesses putting productivity-boosting investment plans on hold in the face of uncertainty. NIESR said it now expects hourly labour productivity growth to average just 1% over the next five years, compared with a 1.2% expansion in its previous forecasts. | According to NIESR, Brexit could make matters worse, with businesses putting productivity-boosting investment plans on hold in the face of uncertainty. NIESR said it now expects hourly labour productivity growth to average just 1% over the next five years, compared with a 1.2% expansion in its previous forecasts. |
| Garry Young, a former Bank official who recently joined NIESR as director of macroeconomic modelling and forecasting, said: “The evidence suggests that continuing uncertainty about Brexit and the possibility of an averse change in trading arrangements in the future is affecting investment and productivity now.” | Garry Young, a former Bank official who recently joined NIESR as director of macroeconomic modelling and forecasting, said: “The evidence suggests that continuing uncertainty about Brexit and the possibility of an averse change in trading arrangements in the future is affecting investment and productivity now.” |
| Lower levels of productivity stand to damage the public purse, as less economic output means weaker tax revenues for the government. According to the Institute for Fiscal Studies (IFS), lower rates of productivity growth could lead to a £20bn black hole in the nation’s finances by 2021-22. | Lower levels of productivity stand to damage the public purse, as less economic output means weaker tax revenues for the government. According to the Institute for Fiscal Studies (IFS), lower rates of productivity growth could lead to a £20bn black hole in the nation’s finances by 2021-22. |
| The IFS said on Monday it was therefore difficult to see how the chancellor can both maintain the credibility of his fiscal targets and respond effectively to growing demands for public spending. | The IFS said on Monday it was therefore difficult to see how the chancellor can both maintain the credibility of his fiscal targets and respond effectively to growing demands for public spending. |
| The Treasury’s official forecasting body, the Office for Budget Responsibility, has also recently said it sees a need to “significantly” downgrade its expectations for the growth in productivity. Meanwhile, Treasury officials privately admit this will stand to erode the public finances. | The Treasury’s official forecasting body, the Office for Budget Responsibility, has also recently said it sees a need to “significantly” downgrade its expectations for the growth in productivity. Meanwhile, Treasury officials privately admit this will stand to erode the public finances. |
| Despite these concerns, NIESR said it still anticipates the government will be able to balance the books by 2022, pointing to high levels of employment contributing to more taxes paid by workers. However it pointed to “austerity fatigue” that may see the chancellor raise public sector wages, which could delay the date at which the deficit is removed. | Despite these concerns, NIESR said it still anticipates the government will be able to balance the books by 2022, pointing to high levels of employment contributing to more taxes paid by workers. However it pointed to “austerity fatigue” that may see the chancellor raise public sector wages, which could delay the date at which the deficit is removed. |
| The forecasting body’s estimates are predicated on a smooth withdrawal from the EU following a two-year implementation period, during which the UK remains a member of the single market and customs union. It also sees trade making a big contribution to GDP over the coming years, as exporters benefit from weakness in the pound and the recovery of the eurozone economy. | The forecasting body’s estimates are predicated on a smooth withdrawal from the EU following a two-year implementation period, during which the UK remains a member of the single market and customs union. It also sees trade making a big contribution to GDP over the coming years, as exporters benefit from weakness in the pound and the recovery of the eurozone economy. |
| Figures on Tuesday showed the eurozone grew by 0.6% in the three months to the end of September, at a stronger rate than expected. On an annual basis, the euro area expanded by 2.5%, outpacing growth in the UK of 1.5% over the same period. | Figures on Tuesday showed the eurozone grew by 0.6% in the three months to the end of September, at a stronger rate than expected. On an annual basis, the euro area expanded by 2.5%, outpacing growth in the UK of 1.5% over the same period. |
| Figures from the Office for National Statistics showed that in 2016 the UK exported £145.5bn of goods to the EU, up from £133.5bn in 2015. The EU accounted for 48.2% of UK goods exports, up from 46.9% in 2015. | Figures from the Office for National Statistics showed that in 2016 the UK exported £145.5bn of goods to the EU, up from £133.5bn in 2015. The EU accounted for 48.2% of UK goods exports, up from 46.9% in 2015. |
| However, the UK’s appetite for imports from the EU increased, sending the value of EU goods sold in Britain up by 7.1%, more than offset the increase in EU exports last year. As a result, the UK’s trade in goods deficit with the EU widened by £9.4bn to £96.5bn. | However, the UK’s appetite for imports from the EU increased, sending the value of EU goods sold in Britain up by 7.1%, more than offset the increase in EU exports last year. As a result, the UK’s trade in goods deficit with the EU widened by £9.4bn to £96.5bn. |
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