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Not just Brexit

The UK has many economic problems other than Brexit
November 29, 2018

UK economic growth has probably slowed down. Purchasing managers' surveys next week could tell us that growth in both manufacturing and services has slowed to its lowest rate since just after we voted to leave the EU in 2016.

It’s tempting to blame this upon the increased uncertainty caused by the Brexit negotiations: the possibility of us leaving next year without a deal has caused some companies to delay investment or expansion. While, like most economists, I agree that Brexit is one of the sillier economic ideas of my lifetime – in the face of stiff competition – it is by no means our only problem. There are several others. Among these are:

  • Slower demand overseas. In the eurozone, purchasing managers say that growth has slowed to close to a four-year low. In China, they might report next week that manufacturing activity is now shrinking. And even in the US they could say next week that growth is slowing, albeit from a rapid pace. This is partly due to the trade war (what was that I was saying about stiff competition?) but not perhaps entirely. Monetary growth in both China and the eurozone has slowed down in recent months. This is consistent with both economies experiencing a normal cyclical slowdown as well as the effects of the trade war.
  • A debt overhang. Bank of England figures show that consumer credit growth has slowed to a three-year low. This is a sign that some people are using their (so far very modest) pay rises to reduce their debt. To the extent that this continues, it suggests that consumer spending won’t grow as fast as pay. This doesn’t just point to slow demand growth. It also implies that profits will be squeezed as companies don’t recoup higher wage costs through higher demand.
  • A weak housing market. Both the Halifax and RICS are likely to report next week that house prices are falling and that demand for housing is weak, while Bank of England data show that mortgage approvals are flatlining at only half their pre-crisis level. While the former is not catastrophic – it means young people have the hope of homes becoming more affordable – the latter is a drag on the economy. It depresses demand for housing-related items such as furniture and carpets.
  • A lack of investment. Business investment is lower than it was two years ago. This is only partly due to companies putting projects on hold until Brexit uncertainty is resolved. Many other things are holding investment back such as the fear that future technical change will render today’s investments obsolete; the realisation that past investments have been motivated by overconfidence; and the scarring effect of the great recession. None of these factors will disappear soon.
  • Stagnant productivity. The ONS says that output per hour fell by 0.4 per cent in the third quarter, which suggests that the rise in productivity earlier this year was just a blip. If – as is likely – productivity growth stays weak, then real incomes won’t grow much: the only uncertainty is whether it will be wages or profits that suffer the most pain. What's more, the lived experience of stagnation will depress the animal spirits of companies and households. 

If Brexit uncertainty is resolved satisfactorily, we might enjoy a brief upturn in growth as companies enact postponed investment plans. We shouldn’t kid ourselves, though: there are good reasons to expect very slow trend growth.