The state of the post-Brexit UK economy

Economists have been surprised by the resilience of the UK economy's data since the Brexit vote, but they caution that we are not seeing the full extent of things quite yet.

A slowing of the business cycle, for instance, is not an instantaneous event and its effects on hiring and spending decisions will take time to filter through. Here we assess the current state of the economy through figures on consumer spending, employment and inflation.

Consumer spending

New UK retail sales figures out today suggest that consumers haven't been too ruffled by the Brexit vote. The volume of retail sales rose by a monthly 1.4% in July, which is well above consensus expectation of a 0.1% rise - reversing June's 0.9% month-on-month fall.

"Growth was largely driven by department stores but also by spending on clothing which probably received a boost from the unusually warm weather in July," says Ruth Gregory, UK economist at Capital Economics.

Don't read too much into the retail sales figures; it'll take time to see the impact hereGregory notes that this relative resilience in spending is not so surprising, since the fundamentals - such as low interest rates, inflation and a strong jobs market - remain supportive.

But she cautions that we cannot read too much into the jump in July's retail sales figures, because it will take some time before we see the full effect on the consumer of a weaker labour market and an increase in prices.

"So it would be fairly surprising if household spending growth didn't slow at all in the aftermath of the leave vote. Nonetheless, today's figures provide us with reassurance that we won't see a material collapse ahead," she adds.

Employment

The employment rate in the UK is now at a record high of 74.5% and the unemployment rate is at its lowest level in over 10 years at 4.9%, according to new figures released by the Office for National Statistics (ONS).

A record 31.75 million people are in work, up by more than 600,000 in the past year and by 2.7 million since 2010.

Minister for employment Damian Hinds says: "These record-breaking figures show that there are more people in work than ever before, which is great news as we build a Britain that works for everybody not just the privileged few.

Employment is a 'lazy' indicator of economic health as it takes time to filter through"We're in a position of strength, but we can't be complacent, which is why we're pressing ahead with our welfare reforms like Universal Credit to ensure it always pays for people to be in work."

The labour market statistics also show that the female employment rate is at 69.6%, the highest since records began in 1971.

At 5.8%, the proportion of 16 to 24 year olds who have left full-time education and are unemployed is close to the lowest on record.

Further, the number of people aged 50-74 in employment now stands at 9.4 million, which is 3.7 million more than there were 20 years ago.

However, many economists point out that employment is a "lazy" indicator of an economy's health as it usually takes a long time to filter through. Further, the employment statistics are based on data from January to June, so the effects of Brexit have not yet been captured.

Inflation

UK headline consumer price index (CPI) inflation was 0.6% in July, up from 0.5% in June, new data released by the Office for National Statistics (ONS) has revealed.

This is the highest inflation rate for 20 months, but still well below the Bank of England's 2% target. Over the coming months inflation is expected to rise, as a consequence of the pound's decline.

When ships sink it takes a while for the bodies to float to the surfaceVarious commentators expect inflation to be at around 3% by this time next year. This is a view shared by JPMorgan Asset Management, which has predicted that by the second half of next year inflation will be running at between 3 and 4%.

Anna Stupnytska, global economist at Fidelity International, predicts that UK inflation should continue heading higher in the coming months, as the weak pound pushes up the cost of imports further.

Outlook

Jeremy Cook, chief economist at payments company World First, says the outlook for the pound remains mixed. He continues to forecast more cuts to the base rate from the Bank of England in November, as well as a slowly deteriorating economy.

He says: "It is also useful to remember that when ships sink it takes a while for the bodies to float to the surface, and there is a long way to travel on both the economic and political journeys for us to say that the EU question is resolved."

This article was originally published by our sister magazine Money Observer here

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