Philip Hammond is coming under increasing pressure to raise public spending in the budget on Monday to protect the British economy against Brexit, against a backdrop of mixed economic developments over the past month.
Ahead of what will probably be the last UK budget in more than 40 years of EU membership, stock markets have plunged amid a cocktail of geopolitical risks, raising the spectre of Britain going it alone just as the world economy enters a tougher period.
The latest snapshot from the Guardian’s Brexit dashboard does, however, show British workers benefiting from the strongest pay growth in almost a decade, unemployment at the lowest level in 40 years and inflation dropping by more than expected. Despite handing a reprieve to cash-strapped families, economists have warned that the storm clouds connected to Brexit are gathering for the UK economy.
Writing in the Guardian, Andrew Sentance, a former member of the interest rate-setting monetary policy committee at the Bank of England, urged the chancellor to take decisive action to maintain business confidence.
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“Despite some positive economic news over the summer, we may well see some harsher economic conditions as we move through the autumn and winter and into 2019,” he said.
To gauge the impact of the EU referendum outcome on a monthly basis, the Guardian has chosen eight economic indicators, along with the value of the pound and the performance of the FTSE 100. Economists made forecasts for seven of those barometers before their release, and in four cases the outcome was better than expected.
In the latest figures, surveys of business activity showed that British firms remained resilient in September, despite a slight growth slowdown for the UK’s dominant services sector. Economists said the readings suggest the UK economy had continued to expand at a rate of about 0.4% in the third quarter, which is the same as the level recorded in the second quarter.
However, failure by Theresa May to agree a deal with Brussels before Britain’s formal departure date on 29 March could trigger a sharp drop in the value of the pound and other wide-ranging negative economic consequences, according to analysis published this month by the Office for Budget Responsibility, the government’s tax and spending watchdog.
The UK’s trading position with the rest of the world deteriorated in August, according to the latest figures, with the prospects for global trade damaged by US import tariffs on China and the EU, with potential to trigger a broad slowdown in economic growth just as Britain leaves the EU – its largest trading partner.
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The latest dashboard points to potential signs of weakness for the months ahead. An abrupt slowdown in consumer spending in September has sounded the alarm that the resilience built up in the UK economy over the summer – when warm weather and the World Cup gave Britain a shot in the arm – has begun to fade.
The volume of retail sales dropped by 0.8% in a month, which was twice the fall forecast by economists ahead of the figures being published. The figures may point towards continuing weakness after official growth figures revealed the British economy ground to a standstill in August.
The EY Item Club forecasting group said the economy would struggle to recover in the final months of the year, with Britain on-track for the worst year for economic growth in almost a decade as a consequence of Brexit concerns among businesses and consumers.
Hammond is under increasing pressure to ditch austerity after May claimed the Tories would end the deep cuts to public spending at the Conservative party conference. Economists are doubtful as this would require either stronger economic growth, higher taxes or higher borrowing in the years ahead, with an estimate from the Institute for Fiscal Studies that Hammond needs £19bn to end austerity and boost NHS spending.
The chancellor may, however, have little choice but to lift spending should the British economy deteriorate further. Writing in the Guardian, David Blanchflower, another former member of the Bank’s MPC, said the conditions were “changing but not for the better”.
“This looks like a really good time for [the chancellor] to end failed austerity that has caused so much unnecessary pain and hardship,” he said.