Britain’s economy: Enjoy the calm before the storm by Simon Tilford
The British economy is estimated to have expanded by around 1 per cent over the second half of 2016, and hence at a similar rate to the first half of the year, outpacing the eurozone by a significant margin. Consumers have continued to spend freely – car sales hit an all-time record of 2.7 million, compared to 2 million in similarly-sized France. House prices have risen further. And business sentiment remains strong: manufacturers’ confidence rose to a two-and-a-half year high in January 2017 and that of services sector firms to a 17-month high. On the face of it, the only sign of something amiss is sterling, which was worth 15 per cent less (in tradeweighted terms) in late January compared with mid-June 2016. How can one reconcile the robustness of the UK economy with the angst and foreboding over the economic costs of Brexit? First, the strength of household spending is the easiest to explain: real earnings (wages adjusted for inflation) rose by around 1.7 per cent in 2016, boosting consumer confidence. Second, booming car sales suggest that consumers brought forward purchases of big ticket items, in anticipation that the depreciation of sterling would push up their prices (85 per cent of cars sold last year in the UK were imported). However, the strength of business confidence poses a bigger challenge to economists who warned that Brexit would quickly damage the UK economy. It suggests that firms either do not believe Britain will lose unimpeded access to the EU single market or that they think leaving the single market will not do much damage to their businesses. Alternatively, it could be that
consumer spending is currently buoyant enough to offset the uncertainties created by Brexit, at least for firms with short investment horizons. The truth probably comprises a mix of these factors. For the six months following the referendum, much of the British business community believed the country would either remain in the single market or negotiate a deal with the EU which gave it pretty much unchanged access to it. It could be that it was only with Theresa May’s January 18th speech that firms accepted Britain really was prepared to trade market access and economic security for sovereignty over EU migration and EU law. Moreover, while some economists overstated the immediate economic impact of a Leave vote, most argued that the real damage would come through after Britain had left the EU, as lower