The new chancellor could barely have hoped for a better backdrop. High street spending is booming, inflation remains low, unemployment is the lowest it’s been for more than a decade. And all that despite the shock referendum result and warnings from people like Bank of England governor Mark Carney and the International Monetary Fund that a vote to leave could spark recession.
But it would be a very unwise chancellor who said Britain had escaped this vote unscathed. Brexit negotiations have not even started and in crucial areas such as business investment very little data is available at this point to reveal quite how much the referendum upheaval has knocked the economy off course.
Enter the government’s independent forecasters then, and the picture the Office for Budget Responsibility paints for 2017 is a gloomy one, even if it’s not quite as bleak as some commentators’ forecasts in the aftermath of the vote.
Consider the effects of the weak pound for a start. The UK currency was hammered by the Brexit vote and is down aabout 10% against the euro and 16% against the dollar since the referendum. That means all manner of UK imports have shot up in price, be it food ingredients for brands like Marmite or metals for car part makers in the Midlands.
It is only a matter of time before those costs get passed on to shoppers in one way or another. Some shelf prices have already risen, in other cases manufacturers are charging the same price for smaller products – a phenomenon known as shrinkflation: like fewer Maltesers in a bag, and less triangular chunks in a Toblerone.
The OBR reckons that next year, inflation will be 2.3%, more than double the current rate of 0.9%.
Just as costs start taking off, the jobs market is set to weaken. The OBR’s conservative forecast is for unemployment to nudge up to 5.2% next year from 5% this year. With companies struggling to get more out of each worker – known as productivity – pay will struggle to keep pace with higher inflation. Average earnings are forecast to grow just 2.4% in 2017, meaning they will be barely rising in real terms. That’s assuming nervous businesses are happy to keep awarding pay rises – the reality could well be worse for workers.
There are some winners in the very near-term. Exporters are expected to get a boost from the weak pound, making their goods cheaper overseas. But in the longer-term they are forecast to lose out as protracted Brexit negotiations hit trade.
With all that on the horizon, Hammond was probably wise to leave himself some spare money to step in when Brexit really starts to bite. Fast-forward to his budget this time next year and it looks like the chancellor will be setting out a budget not for the just about managing – but for the poor and getting poorer.