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Economy stutters as Brexit paralysis sets in

by Vicky Pryce | 21.12.2018

Vicky Pryce is an economist and commentator and former joint head of the UK Government Economic Service.

While politicians bicker about Brexit and Theresa May’s government is trying to frighten businesses by making preparations for a no-deal scenario, the economy is stuttering in the face of political paralysis. Many people are off already on their Christmas holidays – or stuck in Gatwick because of the government’s inability to deal with the completely predictable drone threat. They may not notice the latest data to hit the economy.

Since the 2016 referendum, firms have been reluctant to invest and have instead met any increased demand by hiring more workers. That’s good for employment but bad for productivity as many of these jobs have been in low paid, often part-time, roles. Innovation has suffered and this will have a long term effect on the UK’s competitiveness.

Now we hear that private investment fell again in the three months to September, the third quarter of consecutive decline. Manufacturing, which was in recession in the first half of the year, enjoyed a brief recovery in the summer. But this does not look to have been sustained this quarter as export demand has weakened despite the weaker sterling. Car production fell by a staggering 19.6% in November year-on-year after a 10% drop in October. Despite the devalued Brexit pound, UK car exports have dropped. And business optimism in the sector is at the lowest it has been for 27 years as Brexit uncertainty takes its toll.

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Moreover, despite record employment and an increase at last in real wage growth, the consumers feel squeezed from all angles. They had burdened themselves with extra debt over the last couple of years when interest rates were cut to record lows and huge amounts of liquidity were pumped into the economy to prevent financial collapse after the referendum vote.

Consumers can ill afford to carry on borrowing to finance spending at a time of rising interest rates and increasing insecurity. Retail sales have suffered in recent months and consumer optimism has just declined to the lowest level in 5 years .

The economic malaise engineered by the mishandling of Brexit should not be ignored. The chancellor is hoping that his giveaway autumn budget, which raised personal allowances and the higher tax threshold and improved somewhat investment incentives, will produce better growth next year. But even then we are talking about modest growth of 1.6% at best, as against 1.3% in 2018. In truth even that improvement will be wiped out if business and consumer optimism fail to recover.

Therefore, whatever the politics of Brexit brings next year, the UK economy is now running on debt and borrowing. At some stage this mini bubble will deflate and all over the world markets and investors are pricing in yet more Brexit instability and uncertainty.

Edited by Luke Lythgoe

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