With Boris Johnson insisting the UK will leave the EU with or without a deal on the scheduled departure date of October 31, Britain is braced for a potentially large economic shock.
The prime minister said last month that Brexit was a “massive economic opportunity”, but most independent economists and the Bank of England forecast it will have negative consequences for the economy.
Mark Carney, BoE governor, said this month that a no-deal Brexit would be an “instantaneous shock”, adding: “You actually have businesses that are no longer economic.”
As MPs opposed to the UK crashing out of the EU without an agreement prepare to try to stop Mr Johnson pursuing a no-deal Brexit, the Financial Times outlines the current state of play with the economy. It is the first article in a series.
The UK economy shrank in the second quarter for the first time in almost seven years. Gross domestic product fell 0.2 per cent in the three months to June.
The economy has gyrated with Brexit this year — in the first quarter output was boosted by British manufacturing companies ramping up production to supply overseas customers because of fears of border disruption after a no-deal Brexit on March 29, the UK’s original date to leave the EU.
Second-quarter output was depressed partly by carmakers shutting down their plants in April because they had anticipated Brexit-related turbulence after March 29.
More worrying is the near stagnation of the dominant services sector, with weakness apparent in business services and finance.
Sterling fell 10 per cent following the 2016 Brexit referendum and was then relatively stable against the currencies of the UK’s trading partners.
But since May, the pound has been sliding again, reflecting the increased chances of a no-deal Brexit after Theresa May announced plans to quit as prime minister and Mr Johnson raised the prospect of the UK leaving the EU without an agreement.
With sterling down more than 7 per cent since early May, the currency markets’ verdict is that a no-deal Brexit would be a shock to UK competitiveness that requires a weaker pound.
Lower sterling makes UK exports more competitive, but if the depreciations of 2008 and 2016 are any guide, the main effect will be a stoking of inflation.
Business investment has been weak across the world, but it is particularly poor in the UK, with companies reluctant to commit to capital spending amid Brexit uncertainty.
Growth in investment — in areas such as transport equipment, machinery and IT, and buildings and infrastructure — has stalled just at the point in the economic cycle it would normally increase rapidly.
Business investment fell throughout 2018, and a brief uptick in the first quarter of this year was followed by decline in the second quarter.
But Brexit is far from the only concern for companies, with global trade tensions also weighing on investment decisions.
Companies have been busy hiring people. Unemployment is close to a 45-year low at 3.9 per cent, with policymakers persistently surprised by how many new jobs the economy can create.
The chart shows the relationship between the unemployment rate and regular pay growth from 2001 onward. It highlights how falling unemployment is raising pressure on employers to increase wages, but the economy now delivers lower earnings growth for any level of joblessness than it previously did.
This reflects the persistent weakness in UK productivity, which restrains the ability of employers to increase pay. However, with wage growth edging close to 4 per cent, household incomes will continue to rise.
Consumers are less confident than they were in 2015, but they have propped up the economy over the past three years and there are some signs of a renewed spring in their step. Retail sales grew 0.5 per cent in the three months to July.
The closely watched survey of consumer confidence produced by GfK has repeatedly shown households much happier about their own finances and prospects than their perception about the wider economy.
The one notable black spot is car sales, highlighting how consumers are holding back from big ticket purchases. New car sales for July were at their lowest level since 2012, according to the Society of Motor Manufacturers and Traders.
With the employment rate at a record level, future economic growth depends heavily on securing more output from every worker.
But productivity growth has persistently disappointed since the financial crisis. The average annual growth rate in output per hour worked has been just 0.2 per cent for the past 11 years.
The BoE predicts it will rise to 0.9 per cent, but factors including the high employment rate and baby boomers starting to retire mean the central bank expects the economy’s potential growth rate will reduce from 1.7 per cent over the past four years to 1.4 per cent in the future.
Fixing the productivity crisis is the big economic challenge ahead.