It was one of the biggest concerns after the unexpected Brexit vote result one year ago, and now many people’s fears are coming true as the UK economy seems to be weakening.
It slowed more sharply than predicted through the beginning on 2017 as consumer spending took a dive.
This all happens as a new hung Parliament takes power, with Prime Minister Theresa May and her Conservative Party holding significantly less power than they would like.
The new government faces an economy that is shaky at best, as many of the cracks that appeared after the Brexit vote are now growing.
Through the last three months of 2016, the GDP grew at a pace of 0.7%, causing statisticians to estimate the economy to grow 0.3% during the first quarter of 2017.
However, according to the Office for National Statistics, GDP in the quarter grew just 0.2%, a sharp drop from previous performance. GDP per head, which adjusts for population, remained stagnant, which is worrisome to those predicting economic growth.
Many economists were pleasantly surprised with how fast the economy bounced back after the Brexit vote last June.
However, that early resilience may be fading as increased inflation has put additional pressure on consumer spending. Inflation has been on the rise, and prices have increased since the Brexit vote lowered the pound and increased the cost of exports to the UK.
Since the last general election two years ago, the pound has lost 18% of its value versus the U.S. dollar, and almost all of the decline can be blamed on the Brexit vote.
Most of that inflation is felt by individual consumers in consumer-facing industries like retail and accommodation, many of whom are trying to stretch their monthly budgets to maintain their levels of living and spending.
The drop hasn’t been felt everywhere—business services and finance have seen continual strong growth. The FTSE 100 has been on fire lately, mostly due to the fact that the largely international stocks traded in the market are seeing increased earnings with a lower pound.
In that sense, the record-high levels of the market are a sign that things aren’t going well at home. Some investors are wary to support the pound until it is clear that Brexit negotiations are going smoothly.
Rocky Job Market
The Conservatives are proud of the fact that under their leadership the UK unemployment rate is currently 4.6%, the lowest it has been in more than 40 years.
However, although more people are working, they aren’t necessary making as much. In fact, after two years of above-inflation wage growth, the drop in the pound means that most employees are actually making less than they did before and that their paychecks don’t stretch as far—another nail in the coffin of consumer spending.
According to some experts, the GDP dip won’t last forever. “Should we be concerned? No, the dip is probably temporary,” said economist Kallum Pickering. “With both soft and hard data improving in the second quarter, the quarterly growth rate is likely to rebound to 0.4%.”
The positive outlook is helped by the global economy and has signs that it could improve relatively quickly, with most economists saying they have not even allowed the early 2017 results to change their projections for the coming years.
Positive signs for a quick recovery include an increase in new homes being built, with completed houses seeing more than a 20% increase over the same time last year.
“High inflation is hitting consumers, but a weak pound and a recovering global economy are helping businesses,” said Deloitte chief economist Ian Stewart. “UK growth is likely to tilt away from the consumer towards exports, manufacturing and investment this year. This should keep the UK economy growing at a similar rate to last year.”
The new government faces unknown challenges as Brexit looms and the economy flounders.
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