'The Brexit vote is starting to have major negative consequences' – experts debate the data

David Blanchflower

Professor of economics at Dartmouth College, New Hampshire, and member of the Bank’s MPC from June 2006 to May 2009

With prices and wages heading in different directions, consumers are set to feel the pinch in 2017.

Inflation surprised to the upside again on the latest figures. The consumer prices index rose to 2.3% in February from 1.8% in January. It was the highest rate since September 2013. The retail prices index (RPI) measure, which is used in pay settlements, jumped to 3.2%. Meanwhile, the January estimate of average weekly earnings suggested total pay growth was 1.7%, down from 1.9% in December and 2.9% in November. Wage growth was below 2% in both the public (1.2%) and private sectors (1.9%).

Pay analysts XpertHR suggest in their most recent survey that only 8.5% of pay awards over the next year will result in an increase to employees that is worth the same or more than the current rate of inflation. This pressure is likely to increase further through 2017 as the gap between wage growth and price rises widens. This is bad news for consumers and producers.

Consistent with that, the Bank of England’s agents reported this week that retail sales volumes growth had eased. They expect retail sales to slow further during the year ahead as the fall in sterling feeds through to higher prices, reducing households’ purchasing power. The agents also suggest that firms’ employment intentions pointed to very slight growth in staffing over the coming six months.

There has been a decline in the number of EU immigrants working in the UK. A similar pattern has occurred in the US with the number of illegal immigrants from Mexico declining sharply since Donald Trump won the election. Tourism is also down in the US.

Surveys from the manufacturing, construction and services sectors in the UK suggest the economy has started to slow. In the Markit/CIPS purchasing managers’ indices (PMIs), February’s readings suggest 0.4% GDP growth in the first three months of the year, compared with 0.7% in the final quarter of 2016, according to the compilers.

It is hard to see much good economic news this month. The Brexit vote is now starting to have major negative consequences and it is only going to get worse. You were warned.

Andrew Sentance

Senior economic adviser at the PwC consultancy and member of the Bank’s MPC from October 2006 to May 2011

UK inflation picked up sharply in February to 2.3%, indicating that the squeeze from higher global inflation and the fall in the pound is coming through to consumers. Meanwhile, total pay growth in the latest three months was just 2.2%. So for the first time in several years, inflation is now outpacing pay growth. This pattern is likely to persist through the year, as inflation is set to rise to 3% or more and pay rises are unlikely to keep pace with that rate of increase in prices.

The resulting squeeze on consumer spending is already evident in the retail sales data. The deflator used for retail sales – which measures the prices of retail goods and petrol – has jumped up and is now 2.8% up on a year ago. The equivalent figure for February 2016 was minus 2.5%. In the three months December to February, the volume of retail sales was 1.4% down on the previous three months – the biggest decline on this measure for nearly seven years.

There are other economic indicators pointing to a slowdown. The total number of UK employees increased by just 0.5% over the past year, according to the latest labour market data – the slowest annual rate of increase since the middle of 2012, when the economy was struggling because of the impact of the euro crisis.

A key indicator of the growth of the services sector – the purchasing managers’ index – also softened in March. Indicators of manufacturing activity are stronger, but all business surveys are showing a pickup in the rate of price increases, consistent with forecasts for a continued rise in inflation over the course of this year.

Data released towards the end of last month have also confirmed that 2016 was the weakest year for business investment since the financial crisis, with the volume of capital spending down by 1.5% after six years of consistent growth. This is possibly a sign that uncertainty associated with the EU referendum is having a dampening impact on investment plans, and this uncertainty is likely to persist over the next couple of years as the article 50 negotiations with the EU proceed.

I have been arguing for some time that interest rates should be gradually rising. The problem this year is that the slowdown in the economy could make that more difficult, even though it would be the right policy. The monetary policy committee will probably regret not having acted earlier as the pound continues to weaken and inflation surges.