The British economy is 'no longer shaking off the adverse consequences of the Brexit vote'

LONDON — The economy is “no longer is shaking off the adverse consequences of the Brexit vote,” according to economists at Pantheon Macroeconomics.

Britain’s economy has defied economists’ forecasts and proven robust in the months since the June referendum, but Pantheon’s chief UK economist Samuel Tombs says that is now coming to an end.

What’s the evidence?

For one thing, the higher spending seen towards the end of last year appears to have been fuelled by a borrowing binge.

Consider the chart below:

British households were borrowing freely last year, thanks to low-interest rates and the wide availability of cheap credit, but spending based on credit is unsustainable.

As the chart above shows, borrowing has started to fall this year, as banks cut back on credit card lending due to concerns that workers will be unable to repay loans in the future economic climate.

Other indicators

• Official data indicates a very slow rate of GDP growth this year. While Purchasing Managers’ Indexes indicate quarter-on-quarter growth slowing to around 0.5% in the first quarter of 2017 from 0.7 in Q4 2016, official data points to a figure closer to 0%, as demonstrate by the two charts below:

• Real wages are falling. Inflation is set to exceed 3% in the second half of 2017 as retailers pass on higher prices on imports to consumers. Imports are costlier because the pound fell sharply in value after the EU referendum, and is yet to recover. Wage growth is not, however, set to keep pace with inflation, as the chart below indicates:

Failure for wage growth to track inflation means that households’ disposable income levels will shrink, driving down consumer spending — one of the main drivers of the economy.

That already appears to be happening: Figures published by Visa on Monday found that British consumer spending increased at the slowest annual rate in over three years in the first quarter of 2017.

“Markets are underpricing the chances of a soft-ish Brexit”

What will be the political effect of the economic slowdown?

Tombs predicts that the “weakening economy will soon replace immigration as the public’s top concern” which could, in turn, push the Conservative government towards a “softer” Brexit that one it is currently aiming for.

He says: “We continue to think that markets are under-pricing the chances of a soft-ish Brexit … The government’s majority of just 17 MPs means Remainers have leverage,” says Tombs.

“Electoral arithmetic will take precedent over ideology for the Conservatives as the 2020 election approaches. They stand to gain more seats by pivoting to the centre and taking votes from Labour than by pleasing UKIP supporters,” he says.

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