The Brexit Slowdown Begins (Probably)

When the Bank of England later the Brexit vote forecast 0.8% gross domestic product increase inwards 2017, they expected consumption increase to turn down to merely 1%, amongst solely a pocket-sized autumn inwards the savings ratio. But consumption increase proved much stronger inwards the instant one-half of 2016 than the Bank had expected. As this nautical chart from the Resolution Foundation shows, pretty good all the gross domestic product increase through 2016 was downwards to consumption growth, something they rightly pull every bit unsustainable. (If consumption is growing but the other components of gross domestic product are not, that implies consumers are eating into their savings. That cannot teach on forever)

This rigid increase inwards consumption inwards 2016 led the Bank to modify its forecast. By February

their forecast for 2017 involved 2% increase inwards consumption in addition to GDP, in addition to a substantial autumn inwards the savings ratio.

What was going on here? In August, the Bank reasoned that consumers would recognise that Brexit would atomic number 82 to a pregnant autumn inwards hereafter income growth, in addition to that they would rapidly start reducing their consumption every bit a result. When that didn’t occur the Bank appeared to adopt something about the reverse assumption, which is that consumers would assume that Brexit would direct maintain lilliputian touching on on expected income growth. As a result, inwards the Bank’s Feb forecast, the savings ratio was expected to turn down farther inwards 2018 in addition to 2019, every bit I noted here. Consumers, inwards this novel forecast, would continually hold out surprised that income increase was less than they had expected.

The get-go estimate for 2017 Q1 gross domestic product that came out yesterday showed increase of solely 0.3%, well-nigh one-half what the Bank had expected inwards February. This depression increase figure appeared to hold out mainly downwards to weakness inwards sectors associated amongst consumption (although nosotros volition non teach the consumption increase figure until the instant gross domestic product approximate comes out). So what is going on?

There are 3 possible explanations. The first, which is the to the lowest degree likely, is that 2017 Q1 is merely a blip. The instant is that many to a greater extent than consumers are starting to realise that Brexit volition indeed hateful they are worse off (I noted some polling evidence suggesting that here.), in addition to are forthwith adjusting their spending accordingly The 3rd is that consumption was rigid at the halt of 2016 because people were buying overseas goods earlier prices went upward every bit a trial of the Brexit deprecation.

If you lot direct maintain followed me then far, you lot tin forcefulness out teach an persuasion of how hard this sort of forecasting is, in addition to why the huge fuss the Brexiteers made well-nigh the August to Feb revision to the Bank’s forecast was both completely overblown in addition to every bit good in all probability premature. All Philip Hammond could create exercise to tell well-nigh the latest disappointing increase information was how it showed that nosotros needed ‘strong in addition to stable’ government! I suspect, however, that nosotros mightiness hold out hearing a lilliputian less well-nigh our rigid economic scheme inwards the side yesteryear side few weeks.

Of course of written report increase could easily selection upward inwards subsequent quarters, specially if firms direct maintain wages of the temporary ‘sweet spot’ created yesteryear the depreciation preceding us truly leaving the EU. Forecasts are almost ever wrong. But fifty-fifty if this happens, what I exercise non intend most journalists direct maintain realised yet is merely how inappropriate it is to purpose gross domestic product every bit a mensurate of economical wellness later a large depreciation. Because that depreciation makes overseas goods to a greater extent than expensive to buy, people inwards the United Kingdom of Great Britain in addition to Northern Ireland of Britain in addition to Northern Republic of Ireland tin forcefulness out run across a deterioration inwards their existent income in addition to hence good existence fifty-fifty if gross domestic product increase is reasonable. As I pointed out here, that is why existent profits direct maintain fallen since 2010 fifty-fifty though nosotros direct maintain had positive (although low) increase inwards existent gross domestic product per head, in addition to every bit I pointed out here that is why Brexit volition brand the average United Kingdom of Great Britain in addition to Northern Ireland of Britain in addition to Northern Republic of Ireland citizen worse off fifty-fifty if gross domestic product increase does non decline. If it does decline, that merely makes things worse.