Economic data shows that Britain’s economy is in a sweet spot but, now, Brexit is going to totally wreck it.
Earlier on Wednesday, the Office for National Statistics dropped its most recent data on the state of the UK’s jobs market, and to say things look good would be an understatement.
Unemployment is at just 4.9%, a low not seen in more than a decade, and employment is at 74.4%, higher than at any point since records began in the 1970s.
Unemployment in the UK has fallen steadily for several years now, and Britain is approaching the stage where we are pretty much at full employment. The way in which unemployment has fallen since 2010 has led some, particularly supporters of the Conservative government, to dub it as a “jobs miracle.”
Almost everyone in the UK who wants to have a job has got one, and in any way you look at it, that is good news for the country.
There is an elephant in the room however.
The UK’s decision in June to vote out of the European Union has caused massive amounts of uncertainty in the economy, and is threatening to destroy years and years of progress in Britain. Things in the British economy certainly were not looking perfect before the referendum, but a wide variety of indicators pointed to a consistent strengthening.
Undoing all that good work
Not only was employment consistently rising, the UK and Europe’s manufacturing sector expanding after a period of relative depression, but the UK’s construction sector was starting to arrest a slide in its expansion. We were also looking at solid growth forecasts, and the potential for a rate hike by the Bank of England if Britain remained in the European Union.
But now all that good work is being undone in short order thanks to the Brexit vote.
Take a look at unemployment, for example. It may still be falling, but we are pretty much at peak, and virtually every forecast points to a substantial increase in joblessness in the UK once the post-Brexit data starts to come. A recent forecast from Pantheon Macroeconomics, for instance, noted:
“We expect the unemployment rate to rise steadily to about 6% in the second half of 2017, although much will depend on whether people who are made redundant leave the workforce altogether. Over the last five years, growth in employment of older workers has risen sharply, and if these workers bear the brunt of job losses, they may choose to become inactive rather than search for work.”
Earlier in July, analysts at Credit Suisse argued that the UK’s decision to leave the European Union will push the unemployment rate up to 6.5% over the next 18 months, costing around 500,000 jobs.
“On the back of our forecast for GDP growth falling to 1.0% in 2016 and -1.0% in 2017, we can expect the unemployment rate to jump up to 6.5% by the end of 2017. This expected rise in unemployment is likely to squeeze nominal household incomes as wage growth takes a hit,” a CS report — authored by Anais Boussie and other analysts — argued.
So for starters, Brexit is going to cost us almost half a million jobs, but it is also going to batter the country’s manufacturing sector and, in fact, all of Europe’s manufacturers. The European manufacturing sector saw its recovery accelerate in June, but Britain’s vote to leave the European Union could bring that recovery to a total standstill, according to the latest PMI data released by Markit in early July.
Markit’s PMI reading for June showed that the continent’s manufacturers enjoyed their fastest growth of 2016 so far. The eurozone hit 52.8, up from 51.5 in May, and ahead of the 52.6 flash reading from earlier in June. That is the biggest single-month jump so far in 2016.
Individual data for the UK showed PMIs at a five-month high of 52.1, up from 50.4 in May.
Unfortunately for the continent’s manufacturers, the data was collected before Britain decided to leave the European Union, and a result, the burgeoning recovery of the previously depressed manufacturing sector could be pretty short lived.
The purchasing managers index (PMI) figures from Markit are given as a number between 0 and 100.
Anything above 50 signals growth, while anything below means a contraction in activity — so the higher the better.
“Given the uncertainty caused by the prospect of Brexit, it seems likely that business and consumer spending will be adversely affected across the euro area in the short term at least, pulling growth down in coming months,” Markit chief economist Chris Williamson noted at the time.
Another Markit survey also paints a grim picture of the undoing of Britain’s economic progress. Output in Britain’s construction industry fell at its fastest pace since the financial crisis in June, according to the PMI survey from Markit and CIPS.
Granted, construction was already at a pretty low base, and had fallen significantly in 2016, but it was still growing, reading 51.2 in May. Brexit has completely ruined any chance of a recovery.
With activity across the UK economy expected to slow thanks to the uncertainty surrounding how and when Brexit will occur, the slowing construction sector is particularly worrying, with Tim Moore, a senior economist at Markit saying that the reading is “a clear warning flag for the wider post Brexit economic outlook.”
There is nothing we can do about it
As we have noted several times before, all these worrying economic indicators might not be so scary if there was actually much that could be done to protect the economy.
The Bank of England’s base rate is stuck just above zero, and despite the fact that the central bank is pretty much telegraphing a rate cut next month, the prospect of negative rates does not exactly hold much promise. Bar a little bit of pick-up in the Swedish economy since their introduction, and an uptick in eurozone GDP, negative rates have not managed to spur anywhere near as much activity as intended.
The central bank’s other alternative is so-called “helicopter money,” where central banks create new cash and give it directly to people to spend on whatever they want.
But that is not going to happen here any time soon, even if banks like Morgan Stanley have suggested that it could be the way forward. Carney says he is “not a believer in the concept” and has effectively ruled out helicopter money, saying that it can lead to a “compounded Ponzi scheme.”
What is also worrying is that, as Business Insider’s Jim Edwards noted, the BOE’s Monetary Policy Committee are actually holding back any monetary easing until we actually hit a recession — which seems to be virtually inevitable — to make sure a rate cut is as effective as possible.
“The sentiment is that we’re going into recession, but in reality we’re not quite there yet. If he cuts further toward zero, he deprives himself of weapons for when we’re actually in recession. Better to keep the oil you have and use it later than to waste it now,” Edwards noted.
Even though we have got a new prime minister, Theresa May, it is unlikely we will see any huge shifts in economic policy. The Tories won last year’s election on a manifesto of cutting the budget deficit (although former chancellor George Osborne scrapped the target of totally eliminating the deficit by 2020 before being replaced by Philip Hammond). The Tories also controlled spending, so the likelihood of the other alternative — big fiscal stimulus in the form of heavy borrowing, and investment in infrastructure projects like railway lines, hospitals, tech ventures, and schools — is still pretty low, even if it is an idea gaining traction in economic circles.
On Wednesday, in her first PMQs since taking office, May seemed to confirm that thought, telling Labour leader she disagreed with his bashing of so-called austerity policies, saying:
“Perhaps I could put the right hon. Gentleman straight. We have not abandoned the intention to move to a surplus. What I have said is that we will not target that at the end of this Parliament. He uses the language of austerity; I call it living within our means.”