So far, there has been no advantage for the UK to leaving the European Union.
Despite a massive decline in Sterling, exports are still struggling.
Bank of England is staring at a low growth, high inflation horizon.
“…It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, …”
“A Tale of Two Cities” Charles Dickens ©1859
This section of the opening lines from Dickens’ celebrated novel is quite apt in describing the 15-months since the UK voted, in a national referendum to leave the European Union (EU).
For the leavers, it was a wondrous monument for the UK as it seized its own destiny and moved into the light away from the bureaucrats of Brussels. For the remainers, the result was a disaster that was sure to plunge Britain into the darkness of an uncertain global economic outlook.
Given, the lack of progress in the “Brexit” negotiations so far it is hardly surprising that the UK economy, hampered by a muddled election result on June 8 is struggling to find its feet.
Last week, the British Chambers of Commerce (BCC) was not in the mood to give the UK’s prospects a ringing endorsement. It suggested that the economy had become trapped inside a channel of low growth that would decline in 2018, whereas, in contrast, the Eurozone would forge ahead.
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Why should this be as since the UK-EU referendum of June 23, 2016 until the close last week the currency has moved in favour of the UK. The same cannot be said for the Eurozone.
Since June 23, 2016:
GBP Index -13.78% EURGBP +19.13% GBPUSD -11.30% EURUSD +6.20% EUR Index +7.14%
Surely, the decline in the value of Sterling against the Euro, Dollar and on a global basis would be a boost to the trade effort and yet the UK deficit on trade in goods and services was virtually unchanged at GBP 2.87 Billion in July cf. with June. Imports fell in the month by 0.2% to and exports also declined 0.2%. In the three-months to July, the trade deficit widened by GBP 0.4 Billion from the previous three-month period to GBP 8.6 Billion.
The BCC said the ongoing squeeze on household budgets and the failure of exporters to capitalise on the low pound meant the UK was “…treading water…”.
Source: Spotlight ideas, Trading Economics
The chart above reveals just how annual GDP growth has remained in a narrow channel since the referendum. The lack of clear direction from government and uncertainty over the UK’s relationship with Europe post 2019 appears to have negated any benefit the decline of Sterling should have delivered.
The forecast for GDP growth has been reduced from 1.3% to 1.2% in 2018, and the same pattern is seen for 2019 when Brexit should come into effect; 1.5% down to 1.4%. In contrast, the European Central Bank (ECB) last Thursday doggedly stuck to their forecasts of 1.8% for 2018 and 1.7% for 2019. No doubt President Draghi is counting on German GDP growth to hold above 2% after Mrs Merkel is re-elected.
Spectre of inflation
What is hampering the UK is that the Bank of England (BOE) appear to be caught on the horns of a dilemma as the weak growth outlook is match by the prospect of inflation returning to 3.0% by year end. AS such an immediate increase in rates is not on the cards. Therefore, inflation will remain above wage growth throughout 2018 to suggest the current level of consumer spending would falter.
Currently household debt to income stands at 126.42% of gross income and household debt to GDP is 87.60%. This is naturally down from the excess of 2010 i.e. 97.10% but comes as consumer sentiment index stands at -10 in August 2017 from July’s one-year low of -12.
The BOE cannot keep saying that inflation will fall; to do so the currency needs to improve and the economy requires rebalancing towards investment and exports This is not a likely scenario for the near future as the uncertainty over the cost of doing business in the UK, the uncertainty around Brexit, and physical constraints created by skills gaps, low productivity and failing infrastructure is not making the UK or the prospects of Sterling look promising.