'Boost from Brexit stockpiling will ultimately unwind' – two experts on the UK outlook

https://www.theguardian.com/business/2019/may/28/boost-from-brexit-stockpiling-will-ultimately-unwind-two-experts-on-the-uk-outlook

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Andrew Sentance

Independent business economist and member of the Bank of England’s monetary policy committee (MPC) from 2006-11

We now have a clearer picture of the UK economy in the first quarter of this year, following the release of the latest GDP figures. At face value, growth looks satisfactory with output up 0.5% on the quarter and 1.8% higher than a year ago. But looking at the detailed picture, there is more reason for concern.

UK economic growth in the early months of this year was buoyed by a big buildup in stock levels, as businesses implemented contingency plans for a no-deal Brexit. Stockpiling provides a short-term boost to output but the positive impact on growth will ultimately unwind.

The latest CBI survey of manufacturers shows that more than a third of industrial firms see their stock levels as “more than adequate”, while less than 10% see them as “less than adequate”. These are the highest stock levels in manufacturing recorded by the CBI since the financial crisis.

With the political turmoil and uncertainty created by a new leadership election in the Tory party, this stock position will not unwind quickly. Many of the candidates vying to replace Theresa May are talking openly of a no-deal Brexit. So the economic indicators could still flatter to deceive us over the summer. But this stock buildup will ultimately unwind, creating a dampener on growth in 2020 or 2021. If a no-deal Brexit does materialise that will also be a negative influence on the prospects for the UK economy.

The other notable economic news in May has been on inflation and sterling. CPI inflation is back above the 2% target and sterling has fallen quite sharply over the past few weeks.

At the beginning of this month the pound was pushing up towards $1.32 and €1.18. It has since fallen about 5 cents against both currencies. With so much political and economic uncertainty, it is hard to see sterling recovering quickly. So a weak pound could push up inflation further in the months ahead.

We are certainly not out of the Brexit woods yet. In fact, we seem to be wandering deeper into the economic jungle and whoever takes over from May will face a major challenge of putting the economy back on an even keel.

David Blanchflower

Professor of economics at Dartmouth College in the US and MPC member from 2006-09

Politics is driving the economics. Our backdrop this week is the political situation, which is just as unclear as it was a month ago prior to Theresa May quitting – hard Brexit; no-deal Brexit, Irish backstop or no backstop, Boris Johnson, Michael Gove or Dominic Raab – who the heck knows? All options other than remain look to be bad for living standards.

This matters because firms are no clearer about what is to come, which is inevitably going to restrict their investment decisions. Plus, the latest data may be as good as it gets for a while, as firms have stockpiled, bringing forward future output. The global trade war that is going on represents a further downside risk to growth.

Inevitably the uncertainty has hit the pound, which was over $1.90 when I joined the MPC in 2006 and is now $1.27, down by a third and down from $1.32 earlier in the month. The pound has also dropped sharply against the euro. None of this looks good for UK businesses. Moreover this does not look like the bottom.

Despite the fact that the unemployment rate fell from 3.9% to 3.8%, the number of people in work fell by 25,000 and the number of permanent employees fell by over 100,000 – so the fall in the unemployment rate was mostly driven by people leaving the labour force. The news about British Steel, Jamie Oliver’s restaurant chain and Thomas Cook does not look to be good for jobs, going forward.

I have been closely tracking wages. Growth in total average weekly earnings has slowed sharply, at only 2.3% in the year to March and 1.7% in the private sector. The average pay packet has only gone up by £1 in the past six months, from £527 to £528.

Pay awards in the three months to the end of April 2019 were worth a median 2.5%, according to data from pay analysts XpertHR. This was the fourth consecutive rolling quarter at this level, showing a period of stability over the year. This runs contrary to the claims of many economists, including those on the MPC, that wage growth is set to explode.

The inflation rate rose in April, eroding what pay packets can buy. Average pay after inflation is 6.2% lower than at the start of the great recession in 2008.

Wage pressure remains weak as there is still remaining levels of labour market slack, mostly from underemployment – when workers are not rising up the job pyramid as they would at full-employment.