Britain’s Brexit car crash is happening in slow motion
Predictions of a snap recession were wrong, but the problems are gradually stacking up
Chancellor Philip Hammond: likely to be restricted from setting aside money to smooth Britain’s exit from the EU. Photograph: Matt Dunham/AFP/Getty Images
Predictions that last year’s Brexit vote would trigger a snap recession in the UK, fuelled by a conspicuous schadenfreude, proved wide of the mark.
In reality the economics of Brexit have been more of a slow burn, centred on a 16-month long slump in sterling.
This has increased the price of imported goods for British consumers, lifting inflation to 3 per cent, its highest level in five years. It was an anaemic 0.3 per cent just a month before the referendum.
Combined with sluggish wage growth, this has led to an erosion of purchasing power, which has now begun to put the squeeze on retail sales, which slumped in September.
Normally a level of inflation above 2 per cent would prompt swift action by the Bank of England in the form of an interest rate increase. While this is still on the cards, the bank is understandably fearful an increase in rates may accelerate the slowdown in consumer spending.
Separately, the UK’s Office for Budget Responsibility has announced it overestimated UK productivity, the upshot of which means Chancellor Philip Hammond’s November budget will have to be based on more pessimistic growth forecasts, potentially restricting him from setting aside money to smooth Britain’s exit from the EU.
Hammond last year promised to amass a £27 billion war chest to help boost growth during Brexit but if growth is slower, there will be less money to set aside from tax receipts. Ironically one way of plugging the productivity gap is by opening the gates to cheaper migrant labour.
As these issues ebb and flow, Britain inches closer to the exit chute with nothing agreed on its likely departure bill and not a scintilla of work done on its future trading relationship with the EU.
The OECD lobbed a grenade into the mix this week by calling for a second referendum, suggesting a reversal of the original decision would benefit the economy, a call that is unlikely to do anything but harden the resolve of Brexiteers.