A year after the Brexit vote, the British economy is increasingly looking like the coyote running off a cliff in a road-runner cartoon. Everything seems to be going well for a time, but then it crashes to the ground. For Theresa May, struggling to paper over deep cracks in her cabinet on austerity and the terms of Brexit, the gathering economic clouds are ominous.
British manufacturing output in June increased at the slowest pace in three months, according to a closely watched survey released on Monday. Production undershot forecasts as export orders expanded at the weakest rate in five months, despite the fillip of a sharp drop in the pound since the June 2016 vote to leave the EU.
The government needs exports to help take up the slack left by weakening consumption. With prices rising faster than wages, households have kept up their spending by borrowing more and drawing down their savings. The ONS calculates that Britons squirreled away just 1.7% of their income in the first quarter, the lowest savings rate since comparable records began in 1963. In the intervening 54 years, the ratio has averaged 9.2%. What’s more, for the first time since the 1970s, disposable income has fallen for three quarters in a row. No wonder that several economists called the decline in savings unsustainable. No wonder, either, that consumer confidence has tumbled to the lowest level since last July.
Alongside exports, the government is also counting on corporate investment to pick up the growth baton from consumption. But business confidence slumped after the general election, a survey by the Institute of Directors found. The combination of a weak minority government and a lack of clarity over the terms of Brexit is causing company bosses to sit on their hands. Investment in the car industry fell 30% last year and is dropping at an even faster rate this year, according to the FT.
On top of uncertainty over what future access UK exporters will have to the single market and on what terms, employers can’t be sure they’ll be able to hire the expert EU staff on which they have come to rely. More than half of skilled EU workers employed by FTSE 250 companies are likely to leave the UK before Brexit, one recent survey found. Wimbledon, which starts today, is a reminder of the British economy’s dependence on EU workers. The 28,000kg of Kent strawberries that will be guzzled at the tennis tournament are picked mainly by seasonal labourers from eastern Europe. Growers warn that the price of summer berries in the UK could jump by half after Brexit if there is no alternative scheme to bring in seasonal farm workers.
Politically, the darkening economic picture spells trouble for May. With average weekly earnings adjusted for inflation still lower than they were a decade ago, practically her entire cabinet has concluded that they must ease up on austerity and relax the squeeze on public sector pay. Not surprisingly, this has irked chancellor Philip Hammond, who will have to find cuts elsewhere, raise taxes or go deeper into debt to meet a rise in the public sector wage bill.
Popular support for the hard Brexit that May advocates can only decline if the economy weakens during the divorce talks. But the prime minister is in a terrible bind. If she backs away from the staunch defence of austerity she made during the election, she will burnish her reputation for being weak and wobbly, rather than strong and stable. Britain’s EU negotiating partners will take note. Yet if she tries to hold the line, her days in power could be numbered. Like the coyote running off the edge of the cliff, the prime minister is discovering that the laws of gravity are inescapable.
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Edited by Luke Lythgoe
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