InFacts’ readers may care to entertain themselves tomorrow by counting how many times Chancellor of the Exchequer Philip Hammond mentions “Brexit” in his Autumn Statement. The chances are it won’t be often – but despite Hammond’s best efforts, Brexit will be the ghost at the feast (or, more probably, a dry crust).
The economic turbulence many had expected from the Leave vote is surfacing. This isn’t merely another economic migraine of the sort that plagues chancellors. It also threatens to make managing the politics of Brexit even more complicated, just as the government struggles to find a position from which to trigger Article 50.
The UK’s mounting economic difficulties will make it much harder for the government to meet the expectations of Leave voters and to keep the promises to them prime minister Theresa May has made. Our negotiating hand with the rest of the EU will be weaker, there will be no Brexit bonus anytime soon for UK workers and consumers, and voter discontent may grow.
Hammond will try to convert at least some of prime minister Theresa May’s promises to help those who are “just about managing” into actions – perhaps on childcare subsidies and freezing fuel duty – and introduce longer-term measures, for example on industrial policy and infrastructure spending. He has already junked his predecessor’s budget rules.
But the most authoritative recent projection for the UK economy, released earlier this month by the National Institute for Economic and Social Research (NIESR), points to the huge economic obstacles the government faces. The main ones are increasing inflation, rising medium and longer-term interest rates, and slowing growth in real incomes.
The NIESR expects the economy to grow by only 1.4% in 2017 compared with 2.0% this year and says that a combination of higher inflation and slower economic growth could even cause real wages to fall next year – not exactly a Brexit bonus.
Surging consumer debt has been key to the fragile economic recovery from the 2008 crash. But soaring consumer debt burdens are close to their highest level for five years, according to a recent survey by the British Bankers’ Association, while inflation and interest rates are likely to rise.
The most striking feature of the NIESR forecast is the inflation trend. Largely because of the nearly 20% decline in the pound this year, the NIESR said: “We expect consumer price inflation to overshoot the Bank of England’s target [of 2%], reaching close to 4.0 % by the end of 2017.”
Even the Bank is saying that inflation will slightly overshoot its 2.0% target, reaching 2.75% in 2017 and 2.5% in 2018. As the inflation outlook deteriorates, the Bank may find itself under pressure to raise short-term rates – the US is expected to do so next month – to curb inflation and defend the pound. UK and US long-term government bond interest rates have already gone up by 0.5% this month.
Mr Hammond can expect further bad news from the Office for Budget Responsibility (OBR), which is supposed to keep chancellors honest. Widespread leaks at the weekend indicated that, on Wednesday, the OBR will sharply downgrade its growth forecasts for 2017 and 2018.
This will confirm the expectations of official forecasters like the International Monetary Fund, think tanks like the NIESR, and private sector forecasters like Barclays Bank, which on Friday warned of a “Brexit-related slowdown”.
Whatever Mr Hammond does to try to offset the economic slowdown, he will be testing the patience of the – often foreign – investors who finance the UK. They can see that inflation is rising and growth slowing in an economy already weighed down by a big budget deficit and government debt which is 90% of GDP – an “eye-watering level of debt”, as the Chancellor admitted on the BBC’s Andrew Marr Show on Sunday.
The same investors are also acutely aware that the UK’s current account deficit, at over 5.0% of GDP, is the biggest amongst the world’s advanced industrial economies. Mr Hammond will be looking over his shoulder at the Brexit ghost, whether he refers to its presence or not.
Edited by Michael Prest