Today we learned that economic growth slowed significantly at the end of 2018, with GDP only growing by 0.2 per cent in the last three months of the year. This is around a third of the pre-crisis average rate. In December alone, the economy contracted by 0.4 per cent, with the manufacturing sector now having contracted for the last six months.
Given the slowing of global growth and heightened Brexit uncertainties, it’s unsurprising that our economy is not growing faster. But beyond our growth outlook, what’s happening to the UK’s economy deserves greater attention. Because while politicians endlessly debate Brexit, family finances are being affected in the here and now.
Weaker growth in the fourth quarter of 2018 follows a general growth slowdown since the referendum in 2016. This isn’t the recession that some unwisely predicted; rather, it’s the slow burn of an economy where productivity growth has been lower than expected. The result is that our economy is now 1.2 per cent smaller today than the OBR projected it would be before the referendum. That percentage amounts to £24 billion or £800 a year for every household in the UK. The Bank of England thinks the GDP hit is nearer 1.5 per cent, while other research finds a slightly bigger effect.
But the fact that we’re doing less well at producing stuff than expected isn’t the end of the story. In fact, household incomes have taken a much bigger hit than GDP over the past two and a half years. That’s because they have faced a second headwind: prices rising faster in shops than had been anticipated. This is the result of the tanking of Sterling pushing up import prices and ultimately the costs of consumer products. Putting these (low) growth and (high) inflation trends together, new Resolution Foundation research finds that real household incomes are a very worrying £1,500 lower than they were expected to be, according to pre-referendum forecasts, and despite employment continuing to reach new record highs.
If that’s not enough to remind politicians on all sides of how high the stakes are, I don’t know what is.
Now, of course, no one can say definitively what impact Brexit itself has had – or whether it was the key driver behind the £1,500 underperformance in household income. But it’s difficult not to conclude that Brexit has been the single biggest driver of this economic malaise – not least because of the role that higher inflation has played.
Yes, there has been a recent slowdown in other countries, too: notably Italy, Japan and China. But the UK’s underperformance predates this trend. And during the post-referendum period as a whole, the global economy has actually done better than expected. Taking these factors into account, British household incomes are actually more like £2,000 worse off today, compared to a situation where they had grown in line with the average rate of other advanced economies.
So while the global economy is important, this is principally a UK story.
The long-run impact of Brexit on our economy will of course depend on what we eventually agree by way of a new trading relationship with the EU, but this isn’t just about where we end up, it’s about how we get there. Politicians are currently doing a truly awful job of working through that difficult journey. This is far from cost free. Theresa May opposes a customs union while basically making the case for one (to avoid tariffs or rules of origin checks) while Labour pretends we can be “aligned” to the single market while avoiding state aid rules or freedom of movement.
Every interview where politicians fail to explain exactly what kind of relationship they favour, or the trade-offs they would make, contributes to the recent spike in economic uncertainty. As research shows, and our recent incredibly weak investment performance reinforces, this has a very real impact on business investment – one of the key drivers of living standards growth.
Some business investment will simply be delayed. But investment that goes elsewhere because of the Brexit process, or simply never happens, represents a hit to family living standards that have already faced an unprecedented decade of stagnation.
Running down the clock might seem a logical move for those seeking to manage deep divisions within their parties. But it amounts to inexcusable economic vandalism. So today’s growth figures – coming as they do on the back of a major hit to household finances since 2016 – should remind politicians in all parties that it’s the journey of how we get to Brexit, not just the final destination, that matters for living standards.
Torsten Bell is the director of the Resolution Foundation.