Britain’s economy saw the first cracks appear from Brexit uncertainty in 2017 as growth slowed and households were gripped in the worst income squeeze since the 1950s. After a resilient performance in 2016, the economy kicked off 2017 with sharply slowing growth and a flurry of downgrades after Brexit-fuelled inflation saw cash-strapped consumers cut back on spending.
Inflation surged to levels not seen for more than five years, hitting 3.1% in November, as the full impact of the pound’s plunge since the Brexit vote sent the price of food, energy and services soaring. Combined with paltry wage growth, family finances suffered a double whammy as pay failed to keep up with inflation.
Bank of England governor Mark Carney told Britons to brace for impact in the spring as he warned 2017 would see the worst of the squeeze. Just six months later, the Bank delivered its first interest rate hike for a decade as it sought to cool inflation, with a rise from 0.25% to 0.5%.
The milestone move reversed the quarter point emergency cut seen in the wake of the Brexit vote and came as the Bank admitted growth was set to languish at a new “lower speed limit”. The Bank also signalled another two hikes may be needed over the next three years to bring inflation back to target, which could take rates to 1%.
Activity pulled back from 0.6% in the final three months of 2016 to a meagre 0.3% in the first quarter and has since bumped along, edging slightly higher to 0.4% by the third quarter.
While this was still a long way off the doomsday predictions of many in the run up to the Brexit vote – including the Bank itself – it showed that the uncertainty surrounding negotiations were undeniably taking their toll.
Mounting uncertainty over the UK’s future relationship with the EU has held back business investment and consumer spending, while also sending import costs racing higher for UK firms. The Office for Budget Responsibility delivered a withering assessment on Budget day when it slashed growth predictions for the next five years.
It also pencilled in lower government borrowing this year and next, but hiked its long-term forecasts.
But it is households who appear to have suffered the most, with real wages the weakest since the middle of the 19th century. As Mr Carney said in the spring when the squeeze first began emerging, households will face a “more challenging time” in 2017.
It has not been all gloom, however, with employment at record levels and the weak pound offering a much-needed boost to the manufacturing sector. The most recent survey from the sector showed Britain’s manufacturing activity jumped to its highest level in more than four years amid solid domestic demand and a wave of export orders.
Service sector growth has been pegged back, but this may come as a welcome rebalancing of the economy.
Mr Carney also pronounced alongside hiking rates that the worst of the income squeeze is over, with wages showing signs of picking up and inflation due to start easing back.
Policymakers said in the last rates meeting of the year that there were further signs of respite on the way for households as it confirmed inflation was “close to its peak”. But on the economy, the Bank signalled a year-end dip in growth, forecasting a slight slowdown in the fourth quarter on the 0.4% seen in the previous three months.
There were also signs of cracks appearing in the otherwise robust jobs market with the number of people in work falling by 56,000 between August and October – the biggest quarterly drop in more than two years.
This is small beer, given that there are just over 32 million people in employment, but the reduction is the largest since the three months to May 2015 and will be watched closely for signs of further falls in months to come.
Investec economist Philip Shaw dismissed the employment fall as “erratic” and said he believed that labour market conditions will “continue to tighten”. He believes the outlook will get cheerier as “the pace of economic expansion will edge up slightly over the next year or so, supported by strong global growth, less restrictive fiscal policy and a fall in inflation easing the squeeze on household finances”.
Though next year will undoubtedly be buffeted by developments in Brexit negotiations as talks enter more crucial phases. Borrowers could also be hit with one or possibly two more rate hikes by the end of 2018, although as the Bank has said itself, there are more than a few “uncertainties” ahead with the country facing one of its biggest upheavals in living memory.