In Focus Consumer Credit


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The impact of Brexit Given the performance of the global


economy – acceleration in 2016 and 2017, followed by some slowing during 2018 – we would have expected a similar economic performance in the UK: a strong acceleration, followed by some slowing. Instead, we have seen UK GDP growth


slowing throughout this period, from an annual pace of around 2% to less than 1% annualised in fourth quarter of 2018 and first quarter of 2019. The reason for this underperformance relative to the rest of the world is uncertainty surrounding the prospect of Brexit since the referendum in June 2016. Consider the following thought experiment:


what if nothing unusual had happened in the UK domestically and UK growth had been in line with its close historical relationship to the rest of the world? Figure 2 quantifies this thought experiment


with what is known as a ‘synthetic’ UK economy without Brexit. What is shown here is how much weaker the economy has been relative to what we might have expected, given the global growth data. The different lines in Figure 3 show


estimates using different country groups, just to show the result is robust to which countries are used to proxy ‘the rest of the world’. The analysis suggests that since the vote in June 2016, we have lost 2% of GDP relative to a scenario where there had been no significant domestic economic events. That amounts to around £40bn per year, or £800m per week of lost income for the country as a whole. Nothing in our trading relationship with


the EU has actually changed over this period. These costs are only related to expectations of future changes, and uncertainty about future changes. To better understand how the economy


has responded to these given changes in expectations and uncertainty, it is instructive


Fig 4: UK investment relative to G7


Nothing in our trading relationship with the EU has actually changed over this period. These costs are only related to expectations of future changes, and uncertainty about future changes


to look at two large subcomponents of GDP: namely business investment and household consumption. During a period when business investment


in the rest of the G7 has accelerated to 6% annual growth, the UK has been stuck around zero, deteriorating to –3.7% year on year over the course of 2018 (Figure 4). Firms have been saying, in a number of


surveys, that the uncertainty about our future relationship with the EU is a source of concern for them that has been weighing on their investment spending, as plans for expansion have, on average, been scaled back (Figure 5). As we approach the March 2019 deadline


without a clear way forward, concerns have intensified and investment has weakened further. That is not too surprising: when any potential change to the future relationship was still many quarters away, there was relatively little firms could or wanted to do in anticipation. As many firms have told me during my


regional visits in 2017, it was too costly for them to sit on their hands and postpone major investment decisions for long periods. Business must carry on. But, as we get closer and closer to the


moment when we will – or least might – learn more about what the future relationship looks like, and how smooth the transition is,


Fig 5: Sources of uncertainty


it makes sense for firms to put more spending on hold. The cost of postponing investment by


several years may be prohibitively high, but the cost of postponing investment by a few quarters is a precaution that many find worth taking, given the vastly different scenarios possible.


Household confidence The response of household consumption, on the other hand, has been quite different. Consumer confidence had been fairly steady in the post-referendum period, with only tentative signs of deterioration in recent months (Figure 6). Even though households’ confidence was


little changed for most of the post-referendum period, their real income has taken a hit. The mechanism by which this took place


was as follows. After the vote, financial markets took a dim view of the UK’s relative future economic prospects. Sterling fell by around 15%, and the share prices of UK-focused companies underperformed by a similar amount. A weaker exchange rate meant imports


became more expensive. With some lags, this fed into consumer prices since around 30% of what we consume comes directly or indirectly from abroad. Higher consumer prices eroded


households’ purchasing power. But even though household-spending growth eased back a little, it did not weaken nearly as much as real income. Households dipped into their savings to


sustain their spending over this period. That may be a sensible thing to do if the reduction in purchasing power is temporary. But if it is permanent, we may at some point see households rebuilding their savings, which would mean weaker consumption demand for a period. CCR


Fig 6: Consumer confidence


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