The Scottish Mail on Sunday
UK braced for a pounding as shoppers face squeeze
Incomes falling as rising prices outstrip pay Import costs soar with sterling slump worsening Interest rates tipped to stay at record lows
HOUSEHOLDS are facing a fresh squeeze on real income, as economists predict new falls in the pound following the General Election result. Figures out this week are set to show that Britons continued to see wages outstripped by inflation in May, with the Consumer Prices Index rising 2.7 per cent and average weekly earnings 2.4 per cent.
The fall in sterling following the Brexit vote has driven up import costs, stoking inflation. Consultancy Fathom Macroeconomics said it expected the pound to drop further, having fallen more than 2 cents against the dollar following the shock Election result.
‘In our view, with markets unduly optimistic about the prospect of a Tory-led coalition, sterling is vulnerable to a further sell-off,’ it said in a note to clients. Uncertainty over the economic outlook means the Bank of England is unlikely to raise interest rates when it meets this week.
Leading business figures grappling with the fallout of the Election result told The Mail on Sunday that it could deter investment and change Brexit outcomes.
Sir Martin Sorrell, boss of the world’s biggest advertising group, WPP, said the result was bad for business and the wider economy. He added: ‘It creates uncertainty, leading to hesitation by those looking to invest in the UK. I cannot see many people wanting to take a risk when uncertainty has risen.’
But he was upbeat on Brexit negotiations, saying: ‘Does this mean we will have a softer Brexit? I think the odds are we will. I would like to see a soft Brexit quickly, but all this confusion means any agreement could take even longer. And remember, we have to put it all to the other 27 countries for approval, so we really don’t have much time.’
UFI IBRAHIM, chief executive of the British Hospitality Association, said while the pound’s fall was ‘good for business’ boosting inbound tourism, ‘it can also be very damaging on costs, so people will be concerned’.
She too saw a silver lining in a softer Brexit. In a poll of BHA members last year, three-quarters favoured staying in the European Union. Now the BHA is warning of a huge skills shortage. Ibrahim said: ‘People will take comfort in the fact it’s likely to be a soft Brexit, especially on immigration, but uncertainty can be damaging.’
Jasmine Whitbread, head of business body London First, agreed saying: ‘You can’t have a global capital without global talent. Talent remains top of our concerns. With the clock ticking on Brexit, securing the rights of EU citizens already working here would be a quick win. What we need is for Government to start engaging with business.’
Gerard Lyons, economic adviser to Boris Johnson when he was Mayor of London and now chief economic strategist at Netwealth Investments, said that while ‘there could be some uncertainty impact’ he expects strong global growth to support the UK economy.
Lyons, one of the eight ‘economists for Brexit’, said the Tories now need to build support for their Brexit position. He said: ‘Given it needs to be approved by Parliament, it has to be debated more.’
For many business people that means explaining what the Government wants to achieve from Brexit. Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders, said: ‘Now more than ever we need strong engagement by Government with the industry, both on the domestic agenda and in European negotiations, to secure future growth and investment in our sector.’
Allie Renison, head of trade policy at the Institute of Directors, said the hung Parliament would make it harder for Theresa May to threaten the EU with a ‘no deal’ scenario. She said: ‘Coming back to Parliament and saying you’ve walked away is a trickier option because more people in the party will not be happy about it.’
Senior Tories appeared to have conceded last week they might seek a ‘softer’ Brexit, potentially staying in the customs union and single market. Brexit Secretary David Davis said as the votes were being counted that leaving the customs union and single market were in the Tory manifesto, adding: ‘We’ll see by tomorrow if the British people have accepted that or not.’
Scottish Conservative leader Ruth Davidson meanwhile talked about pursuing an ‘open’ Brexit.
Walking away from talks without a deal would see the UK trade with the EU on World Trade Organisation tariffs. But there would be big questions over regulations on air travel and nuclear power technology – with some economists suggesting the consequences could be so cataclysmic for trade that the idea was a non-starter.
Firms are still likely to press on with plans to move operations to the EU, even if they do hope a deal allowing them to stay in the UK will be struck. The IoD’s Renison said: ‘I think companies may wait a bit longer to see whether they have to pull the trigger or not.’
She thought there might now be ‘more flexibility around the transitional period due to the Election.’
Banks in particular are seeking a smooth transition between leaving in March 2019 and a trade deal taking effect. Some said because both Labour and Tories had explicitly endorsed Brexit in manifestos, a no-deal scenario was still likely.
Professor Patrick Minford, another of the ‘economists for Brexit’, said: ‘If the EU doesn’t negotiate in a sincere way and tries to bully us there will be a coming together of the clans in the UK to say no deal is better than a bad deal.’
But Lee Hardman, currency analyst at Mitsubishi UFG, said: ‘There are now hopes of a softer Brexit. But markets should be cautious of banking on this.’