The closer Britain gets to Brexit, the closer it gets to recession

Daniel Leal-Olivas/ AFP/ Getty Images.

  • UK GDP growth was just 0.1% in Q1, and Britain is just 11 months away from Brexit.
  • The housing market is crashing, and Brits are feeling poorer.
  • They have slowed down their consumer spending too.
  • Suddenly, this whole Brexit thing is not looking so rosy.

LONDON – The closer Britain gets to Brexit, the closer the country gets to a recession.

UK GDP growth was just 0.1% quarter-on-quarter in Q1, the government reported on Friday. With the March 2019 Brexit deadline now less than a year away, that’s “near stagnation,” according to economist Chris Williamson of IHS Markit. Over the last 12 months, “The economy was just 1.2% larger than a year ago, the weakest performance for nearly six years,” he says.

You can see from this chart that economic growth in the UK (the black line) has been in decline for a while. The EU Referendum did not halt that slowdown.

GDP Q1 2018Pantheon Macroeconomics

Britons are suddenly feeling much poorer than they were a year or two ago. House price growth is declining. The property market is dangerously close to entering an actual contraction. British people can no longer rely on their houses to add significantly to their wealth.

House prices 2018Pantheon Macroeconomics

More worryingly, the forward-looking index of mortgage approvals and new buyer enquiries has collapsed. People don’t want to buy houses if they think the value of those houses is going to go down.

Mortgage approvals 2018Pantheon Macroeconomics

It’s not just about houses. Consumers generally are spending less. Consumer spending and retail sales are two of the main drivers of economic growth. And yet they are in a near-slump, with growth somewhere around 0%.

Retail sales 2018Pantheon Macroeconomics

Consumers have become more worried about the future. Their “confidence” in their own financial situation and the economy generally is zero, at best, and sharply negative at worst, according to ESI data.

ESI indicatorPantheon Macroeconomics

Few economists are predicting an official recession – two consecutive quarters of contraction – right now, even with growth at near-zero. But consumers are behaving as if they are about to go through hard times. Consumer confidence is in decline. Their response has been to increase their intention to save money.

Consumer confidence and retail salesPantheon Macroeconomics

These declines have all come at the same time as a 7-point collapse in support for Brexit, as tracked by YouGov (and monitored in this chart by analyst Samuel Tombs of Pantheon Macroeconomics). There has not been a majority in favour of Brexit since May of last year.

Brexit opinion polls 2018Pantheon Macroeconomics

Clearly, delinking Britain from its largest and richest free-trade neighbour will have negative economic consequences. After the 2016 referendum, the economy got a short-term boost as the pound was devalued and exports went up. But the sugar-rush has now gone. Businesses are making long-term decisions on where to invest, where to create jobs. And as Koji Tsuruoka, the Japanese ambassador said recently, it won’t be the UK if Britain doesn’t stay closely aligned with the Single Market and the customs union: “One thing I can say for certain, based on fact, is that the companies operating today in the UK are not expanding their investment in the UK today.”

“This is the best gateway to Europe,” he said last week. “If that is in danger, if that is no longer sustainable, of course they will have to look at what they will have to do best. The existing arrangement for the single market is a total frictionless trade.”

Predictably, the economy is already responding. The closer we get to Brexit, the worse the picture looks.

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