The British consumer is holding up the country’s economic performance but key sectors are showing signs of strain as Boris Johnson threatens to take the UK out of the EU without a deal, according to a Guardian analysis.
In a sign of the mounting stress facing the economy, the pound has slumped to the lowest level against the US dollar for 28 months amid rising fears that Johnson may pursue a no-deal Brexit.
The slide in sterling comes as economic growth dips to stalling point. The National Institute of Economic and Social Research (Niesr), a leading thinktank, said this month there is a one-in-four chance the UK has already tipped into recession even before the threat of a disorderly departure on 31 October. Global economic growth is also slowing against the backdrop of the US-China trade war, with the impact spilling back on Britain.
However, economic growth has been supported by consumers continuing to spend, despite a slowdown in activity among businesses as they put spending decisions on hold.
Writing in the Guardian, David Blanchflower, a former member of the Bank of England’s monetary policy committee (MPC), said Johnson’s no-deal Brexit stance represented the biggest threat to a fragile economy.
“Company bosses continue to warn Johnson against pursuing a no-deal Brexit and he ought to listen. Such a scenario is the biggest downside risk to the UK economy and would be a disaster for living standards,” he said.
To gauge the impact of Brexit on a monthly basis, the Guardian monitors eight economic indicators, along with the value of the pound and the performance of the FTSE 100.
Economists made forecasts for seven of those barometers before their release, and in four cases the outcome was better than expected. One met its forecast while two fell short of expectations.
Presented with the challenge of Brexit alongside the global slowdown, the Bank will update its growth forecasts on Thursday with its quarterly inflation report and a press conference featuring its governor, Mark Carney.
Threadneedle Street is expected to keep interest rates at 0.75% until there is greater clarity over Brexit, though economists widely believe the UK crashing out of the EU without a deal would trigger an emergency rate cut.
Despite mounting concerns over the path ahead, the latest economic data revealed a mixed picture for Britain. Among bright spots was inflation remaining at the Bank’s target rate of 2% for June and wage growth accelerating at the fastest annual rate since 2008, helping households to strengthen their finances.
Consumer spending increased unexpectedly by 1% on the month in June, despite a forecast for a 0.3% contraction among City economists, in a sign that Britons tuned out of the political drama at Westminster. The under-pressure high street also put in a strong performance as retail sales rose by 3.8% on the year, also beating forecasts.
However, there were signs of storm clouds gathering. Business surveys revealed a slump in company activity as Brexit uncertainty bites, with both the building and manufacturing sectors falling into contraction.
The latest snapshot from IHS Markit and the Chartered Institute of Procurement and Supply showed the service sector barely recorded growth in June, in a sign GDP likely fell in the second quarter. The services sector, which ranges from banking to restaurants and hotels, accounts for around 80% of gross domestic product.
Economists warned that activity would probably continue shrinking as the summer turns into autumn, because Johnson ramping up no-deal rhetoric could lead companies to put investment decisions on hold.
Writing in the Guardian, Andrew Sentance, a former member of the MPC, said growth was slowing as Brexit loomed. Official figures for the second quarter are expected to be published next week, with some economists predicting a contraction of 0.2%. Sentance said the third quarter could be just as bad.
“The current quarter is likely to be no better while there is so much talk of a no-deal Brexit. 2019 looks set to be another disappointing year for the UK economy,” he said.
