- GDP numbers show the economy got stronger after the Brexit vote in June.
- But that growth came because consumers went into more debt.
- Wages actually stalled.
- This isn’t sustainable. The post-Brexit crash is still on the horizon.
The upbeat GDP numbers for the fourth quarter were celebrated by the Leave camp in the UK this week.
Strong growth — 0.7% quarterly — showed that fears of an immediate post-EU Referendum collapse were overblown. This chart (below) from IHS Markit told the tale best. The PMI survey — a poll of managers’ feelings about what company purchases they will make in the future — went in the opposite direction to the real economy, as highlighted in the red box. Everyone feared for the economy, but in fact the economy was doing really well:
Normally, PMI travels in tandem with GDP. The former is a good predictor of the latter. But, at the end of 2016, PMI threw everyone a head-fake, and economists largely bought it, to their embarrassment. Their predictions of doom in the second half of 2016 failed to come true. Ever since, Brexiteers have been celebrating the robustness of the UK economy — and heaping abuse on the “Remoaners.”
But the Brexit cliff didn’t go away.
In reality, we’re standing right on the edge, looking at the abyss.
As Pantheon economics analyst Samuel Tombs put it in a recent note to clients, “The expenditure breakdown of GDP, however, shows that all is not well under the hood.”
All that growth was fuelled by debt
The problem is that all that recent GDP growth appears to have been fuelled by consumer debt. Worker compensation growth collapsed in Q4 2016, as this chart (below) from Pantheon shows, but workers responded by continuing their spending, eating into their savings, and extending their overdrafts:
This is not sustainable, Tombs believes:
“… the surge in unsecured borrowing in Q4 was a one-off. Retail sales volumes fell by 2.1% month-to-month in December and then dropped by a further 0.3% in January. In addition, December’s increase in net consumer credit was the smallest since May 2015. Consumers appear to have resorted to borrowing more temporarily, in order to bring forward big-ticket purchases that they had planned to make in 2017, because they expect prices to rise sharply this year. Households’ inflation expectations shot up in the fourth quarter of 2016.”
“Accordingly, we expect real household spending to rise only modestly this year.”
Retail sales collapsed
Tombs is particularly frightened by these data, showing a sudden collapse in retail sales:
“As a result, we expect quarter-on-quarter GDP growth to average just 0.2% in 2017. This would reduce the year-over-year growth rate to just 1.3% — the slowest rate since 2009 — and make the economy’s recent growth spurt look like a flash in the pan,” Tombs said in his note.
He predicts quarterly GDP growth will be only 0.2% in 2017, or even less.
The culprit is post-referendum inflation: After the vote, the pound tanked as investors pulled their money out of a country determined to cut itself adrift from the second largest free market bloc on the planet. Initially, this translated into good news for the UK: Our exports were suddenly cheap, and the economy benefited from that.
But the longer term looks less rosy.
Inflation will make us poorer, and consumers are already pulling their horns in
Suddenly, consumers are waking up to the fact that now the pound buys less, and that’s going to reduce their spending power, and make them poorer, as this chart (below) from IHS Markit shows:
In sum, four scary things happened recently:
- Wages stalled.
- Consumers ran up debt to temporarily continue their spending.
- They did that because they believe — correctly — that things are going to be more expensive in the future.
- This does not bide well for economic growth in 2017.
As all of that feeds through into the real economy, it’s going to hurt growth and reduce GDP.
In other words, the sudden drop economists wrongly predicted after the referendum is going to happen, it’s just on a longer delay than initially expected.
This is an opinion column. The thoughts expressed are those of the author.
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