British Economy Sends Mixed Signals Ahead Of General Election

Britain's economy accelerated at the end of last year but signs of weakness emerged during the first months of 2017, suggesting the Brexit is starting to take its toll on household spending. The situation may get even worse following UK General Election on June 8th. If Theresa May does not win a majority on Thursday’s election as predicted just a month ago, her ability to drive Brexit reform through parliament will be diminished.

The UK economy grew by only 0.2 percent in the first quarter of 2017, the lowest quarter-on-quarter growth in a year, after expanding by 0.7 percent in the previous three months. The slowdown was mainly driven by the service sector on weak performances of consumer-focused industries, such as retail and accommodation. Moreover, Services PMI fell to 53.8 in May, the lowest reading since February, due to weaker new business growth amid squeezed household budgets and delays with decision making ahead of the General Election.

Consumer spending started to slow as households’ purchasing power declined following the sterling's sharp fall after the June 2016 Brexit vote. In fact, consumer price inflation reached a three-and-a-half-year high of 2.7 percent in April, which ended up hitting real wages amid subdued earnings increases. Still, retail sales rebounded 2.3 percent in that month, recovering from a 1.4 percent fall in March, while unemployment is at 4.6 percent, the lowest level since 1975.

Even with the weaker sterling, imports have been growing steadily over the last year, hitting a new record of £53.9 billion in March and outpacing the rise in exports in recent months. As a result, Britain’s trade deficit widened to a six-month high in March, weighing on growth and dampening hopes that stronger exports could make up for softer domestic demand. 

Still, the UK economy and financial markets have been resilient, with the FTSE 100 setting record highs despite uncertainty over Brexit negotiations. Also, surveys of businesses from manufacturing and construction sectors suggest that the private sector is expanding at a healthy pace in defiance of a slowdown in services. May's Manufacturing PMI was recorded at 56.7, its second-highest level in three years, aided by a weaker pound and strong inflows of new work; and the latest Construction PMI pointed to the strongest expansion in that sector since December 2015, boosted by incoming new work and a pick up in the pace of job creation.

The Conservatives have pledged to deliver a smooth and orderly departure from the EU while maintaining that "no deal is better than a bad deal for the UK", and to balance public sector's budget by 2025. Also, they have promised to increase National Health Service budget in England by £8 billion a year by 2022/23 and to rise an extra £4 billion on schools by 2022. Regarding immigration policies, the Tories have committed to bring net migration down to tens of thousands. 

Meanwhile, the Labour Party has pledged to negotiate a Brexit deal that "puts the economy and living standards first", to bring an end to austerity and to invest heavily in public services. It has also campaigned for a stimulus package of £250 billion over the next ten years and for higher taxes on business and the highest paid. In addition, the Labour Party has promised to abolish tuition fees for university students in England.

Joana Ferreira |
6/7/2017 2:01:37 PM