How has Brexit vote affected UK economy? October verdict

Sterling remains flat as Brexit deal still not reached

The pound held steady on the foreign exchanges over the past month amid a lack of progress in the Brexit talks, which hold the key to either a rally in the value of sterling or a further depreciation. Jon Cunliffe, the deputy governor of the Bank of England, warned of a “big fall” in the pound should Britain fail to agree a deal with Brussels before formally leaving the EU on 29 March. Sterling has dropped by about a cent against the dollar in the past month to stand at $1.30. It remains more than 10% below the levels seen before the EU referendum in 2016.

FTSE 100 hit by US interest rate fears

Global markets plunged in the past month, fuelled by rising concern over the impact of the US Federal Reserve raising interest rates, which could trigger a slowdown in the world economy. The rapid buildup in debt since the last financial crisis has made the world more vulnerable to higher borrowing costs, which could trigger companies and nations defaulting on their debts as the Fed raises rates. Fears over a slowdown in the Chinese economy and the impact over the US-China trade war also had an impact. The FTSE 100, which includes many international companies, has lost 10% since its peak in May – the definition of a market correction.

Better than forecast

Falling food prices fuel inflation slowdown

UK inflation dropped further than expected in September, as the falling price of meat and chocolate cut cash-strapped households some slack. The Office for National Statistics said the consumer price index (CPI) dropped to 2.4% last month from 2.7% in August, confounding economists’ expectations for a modest reduction to 2.6%. The reading is likely to discourage the Bank of England from raising interest rates, as it suggests inflation is gradually falling back towards its target of 2% set by the Treasury, without the need for higher borrowing costs.

Worse than forecast

Trade deficit widens as imports surge

Britain’s trade deficit with the rest of the world widened more than expected with an increase in imports in August, outstripping the total value of UK goods sold to foreign buyers. The global goods trade deficit was £11.2bn, having increased from £10.4bn in July, which was worse than the £10.9bn forecast by analysts. Despite a worse than expected month for British trade, the trade deficit for the year to August has narrowed by £13.5bn. The goods deficit narrowed by £5bn, while the UK’s trade in services surplus widened by £8.6bn. The latest figures from the Office for National Statistics do not augur well for the health of UK trade after Brexit, with the data showing the EU contributed most to the narrowing of the trade in goods deficit.

Better than forecast

Business activity points towards resilient growth

There were positive readings for the British economy from surveys of business activity, despite a slight drop in economic output for the country’s dominant services sector. The latest snapshot from IHS Markit/CIPS purchasing managers’ index showed the services sector – which includes retail, hotels and transport and makes up 80% of the economy – dropped from 54.3 to 53.9 on a scale where anything above 50 indicates expansion. Economists said the slight loss of output meant the UK was still in line for GDP growth of about 0.4% in the third quarter, which was the same level as recorded in the second quarter.

Better than forecast

Pay growth hits highest levels since 2009

The lowest levels of official unemployment since the mid-70s finally appear to be handing British workers the bargaining power required to increase their wages, as the latest set of figures for the labour market showed regular pay growth – which excludes bonuses – hit 3.1% in the three months to August compared with a year ago – the strongest rise in almost a decade. Real average weekly earnings, accounting for inflation, still however lag the peak recorded before the financial crisis.

Worse than forecast

Abrupt slowdown in consumer spending

A strong summer for Britain’s retailers came to an abrupt end in September as weak demand for food hit supermarkets and dragged down spending overall. The volume of sales dropped by 0.8% in a month, which was twice the fall forecast by economists ahead of the figures being published. Retailers had a bumper few months, boosted by the warm weather and the World Cup; however, supermarkets recorded a 1.5% drop in food sales in September. Consumers have come under pressure from high levels of inflation since the EU referendum outcome triggered a drop in the value of the pound, pushing up the cost of imports to Britain.

Better than forecast

Public finances give Hammond budget boost

Philip Hammond was handed a boost from the public finances ahead of the autumn budget, with a smaller than expected deficit in September. The difference between tax income and public spending narrowed to £4.1bn compared with £5bn in the same month a year ago. City economists in a Reuters poll had forecast a deficit of about £4.5bn. So far this financial year, the deficit totals £19.9bn, down 35% from April-September 2017 and the smallest total at this stage of the year since 2002. With the deficit falling further than expected, Hammond could be granted more wiggle room to increase public spending at the budget.

Worse than forecast

House price outlook worst since Brexit vote

House price growth slowed across the country as British surveyors were shown to be the gloomiest about the outlook for property prices since the Brexit vote two years ago. The latest snapshot from the Royal Institution of Chartered Surveyors said its headline house price balance fell to a four-month low of -2 in September, below all forecasts in a Reuters poll. Uncertainty relating to Britain leaving the EU in less than six months and a warning from Mark Carney, the Bank of England governor, to Theresa May’s cabinet that house prices could crash in the event of no-deal both had an impact.

And another thing we’ve learned this month … Will the Conservatives really end austerity?

Theresa May raised some eyebrows when she promised to end austerity in her speech to the Conservative party conference, almost a decade after her party started the deep cuts to public services. Without tax rises or stronger economic growth – both of which are unlikely given Brexit – the pledge is unlikely to be compatible with the Tories’ aim of generating a budget surplus by the mid 2020s. Austerity is currently set to continue for the UK’s poorest households, who have been hit hardest by the policy, according to the Resolution Foundation thinktank. The average poor family with children will lose about £200 from the government’s planned benefit freeze next year.

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