Economic Indicators, December 2018

December’s developments

The economy

GDP growth in Q3, 2018 was 0.6% – unrevised from previous ONS estimates. This is the highest rate of growth since Q4, 2016. Services were the main driver of growth but there were also positive contributions from construction and manufacturing.

The Bank of England Monetary Policy Committee (MPC) left interest rates unchanged at 0.75% in December but noted Brexit uncertainties had “intensified considerably”. The MPC now expects GDP growth of 0.2% in Q4, 2018, down from its previous estimate of 0.3%.

In the three months to October, there were 32.5 million people in employment, an increase of 400,000 on a year earlier. Unemployment was 1.4 million, 49,000 less than a year earlier but 20,000 higher than the previous quarter. Inflation, measured by the Consumer Prices Index, fell slightly to 2.3% in November compared with 2.4% in October.

The three months to October saw an increase in earnings growth. Earnings were 3.3% higher than a year earlier (unadjusted for inflation). This is the highest rate of growth for nearly a decade.

Adjusting for inflation, earnings grew by 1.0% – the highest rate of growth since the end of 2016. Despite this increase, average weekly wages remain below their level in early 2008 in real terms.

Economic impact of Brexit

The Government has published its analysis of the long-term economic impact of Brexit. This examined five scenarios relative to a baseline of staying in the EU.

• Government’s proposed deal (‘Chequers’) – based on the Government’s July 2018 White Paper and its preferred option. In this scenario, the UK is essentially in a customs union with the EU. Barriers to trade with the EU are fairly limited.
• ‘Chequers minus’ – similar to the ‘Chequers proposal’ but incorporating greater trade barriers with the EU. Many commentators argue this is more in line with the parameters of the Political Declaration and therefore a more realistic outcome of a future UK-EU trade deal.
• EEA (European Economic Area) – where the UK is a member of the EEA inside the Single Market (including free movement of people) but not in a customs union with the EU.
• Free Trade Agreement (FTA) – a scenario where the UK and EU sign a free trade agreement. It is assumed there are no tariffs on goods and non-tariff barriers are equal to those in an average trade deal with the EU.
• No deal – the future UK-EU trade relationship is based on World Trade Organisation (WTO) rules, rather than a bilateral trade deal.

The scenarios all found a negative impact on the economy from Brexit. The scale of this impact varied widely, however, from -0.6% to -9.3% of GDP in 15 years’ time. ‘Chequers minus’, the scenario widely thought to be closest to the Political Declaration agreed by the UK Government and the EU, shows an impact of -3.9%.

These estimates imply that GDP will be lower than it would have been had the UK stayed in the EU. They imply slower growth rather than an absolute fall in the level of GDP.

The Bank of England also published a short-term (i.e. up to the end of 2023) economic analysis of the effects of Brexit. This also showed a range of outcomes. Under a “deal” scenario, where the UK has a close relationship with the EU, GDP would be 1¾% higher after five years compared with the Bank’s current forecasts. On the other hand, a “disorderly no deal” Brexit would mean GDP 7¾ % lower at the end of 2023, compared with current Bank forecasts.

Reclassification of student loans

The ONS has announced that it will change how student loans are accounted for in the public finances. The accounting change, which is unlikely to be reflected in the data before autumn 2019, could increase the Government’s deficit by around £12 billion in 2018/19. The ONS was reviewing the issue following concerns that the loans were being recorded in such a way that didn’t, at least in the short-term, fully reflect their expected losses. The expected losses on the loans will now be recorded in the Government’s deficit when the loans are issued, rather than 30 years later when any write-offs occur. It is important to say that nothing real has changed to the way loans are issued and repaid. The ONS’s change is all about how the loans are accounted for and how they show up in the Government’s deficit. There is further information in the Library’s Insight Student loans: ONS changes accounting rules.