THERE is a school of thought that, if you say and think everything will be okay, all will be just fine.
But it is worth noting that this adage seldom, if ever, applies to the economy.
This has been amply demonstrated this week by some very unpalatable inflation figures, which should surely convince even the most ardent Brexiter that the cost of living is being pushed up significantly by the June referendum vote. Specifically, sterling weakness arising from the Brexit vote is a key factor in the jump in inflation.
And, as if this were not enough, figures on Wednesday showed a fall of 6,000 in UK employment on the International Labour Organisation measure in the three months to October and a jump of 2,400 in claimant-count unemployment during November. The fall in employment was the first since the second quarter of 2015. Economists cited the Brexit vote and associated major uncertainty as the key drivers of this emerging labour market weakness.
Positive thinking might have benefits in some aspects of life but it cannot change fundamental economic realities.
Certainly, levels of confidence will affect business investment and consumer spending. However, the fact of the matter is that degrees of confidence or pessimism are dictated ultimately by underlying realities. It is not the other way round. Misplaced confidence, or for that matter jingoism, will not change the weak economic fundamentals following the Brexit vote.
Businesses and households are not stupid. Whether or not they watch economic statistics, they will know which way the wind is blowing.
And, while the weather might be almost tropical for the time of year, there is undoubtedly a chill economic wind blowing into Brexit Blighty. Scotland, while it rejected Brexit by a sizeable margin, is set to feel the effects at least as much as anywhere else. The Scottish Government underlined this point yesterday by cutting its growth forecasts sharply.
Some Brexiters try to accuse those who do not agree with them of damaging the economy by talking it down. Alarmingly, in many cases, they level these accusations in terms that are as depressingly intemperate as they are ill-founded, whenever people dare to point out Brexit’s many downsides.
It was claimed by some at the onset of the financial crisis nearly a decade ago that we were talking ourselves into a deep recession. But such a recession was inevitable, given the near-collapse of the financial system. What was said or not said did not matter one whit.
Likewise, economic damage from the Brexit vote is inevitable and is already manifesting itself. What is said will not change this. In terms of reality, as opposed to Brexiters’ fantasy, June’s vote has created a real economic mess.
The Bank of England is going to face an increasingly difficult task as we head into next year, given rising inflation and weakening growth. It cut base rates to a fresh record low of 0.25 per cent in August, to try to mitigate the impact of the Brexit vote on the UK economy.
However, annual UK consumer prices index (CPI) inflation is forecast by economic experts to surge well above the Bank’s two per cent target next year.
We are already well on the road. Annual UK CPI inflation jumped by more than expected in November, official figures showed on Tuesday. It climbed to 1.2 per cent, from 0.9 per cent in October, and is now four times the rate of 0.3 per cent in May, ahead of the Brexit vote. And the breakdown of the latest inflation numbers provides no crumbs of comfort.
The Office for National Statistics noted sterling’s depreciation against the dollar had pushed up the price of petrol, and of technology. Apple and Microsoft have been among those to raise sterling prices because of the pound’s weakness.
November saw the biggest month-on-month jump in clothing prices in about six years. Given that much of the clothing purchased in the UK is sourced from overseas, it would seem reasonable to think the pound’s weakness in the wake of the Brexit vote might be playing a big part in pushing up clothing prices.
Furniture prices also exerted an upward impact on the annual inflation rate between October and November. It is worth observing that a lot of furniture is imported these days.
Investment banks and software companies have been among those to warn they might have to shift operations from the UK to other European countries because of the Brexit vote, given their need for continuing access to the single market and skills.
The Central Bank of Ireland revealed yesterday that a growing number of global insurers were considering setting up European headquarters in Ireland, rather than the UK.
Surveys have signalled UK business leaders across many sectors are considering where to locate operations.
Against this backdrop, and given poorer UK growth or perhaps worse will cause companies to rein in costs, there would seem likely to be further labour market weakness to come.
Normally, the Bank of England’s Monetary Policy Committee might respond to increasing inflation by raising benchmark interest rates.
However, this might not be a particularly palatable option, given general economic weakness and worries over levels of personal indebtedness.
Whatever happens, savers look likely to see the value of their cash eroded in real terms. And households seem certain to see the cost of living rise at a rate that will far outstrip what seem likely to be fairly paltry pay rises from, in some cases, nervous companies.
Pretending Brexit is great, or is not affecting the economy, will not stop the cost of living surging. It will not stop growth slowing. The bottom line is that the Brexiters can, and no doubt will, say what they like to hear, but their words will be cold comfort to many thousands of households who find themselves under even greater strain because of the Leave vote.
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