The challenges of subdued business investment, stretched consumers and austerity – all of which are coming to the fore as Brexit uncertainty grows – pose major questions for the UK economy that are unlikely to be answered in the forthcoming Spring Statement, according to a new report published today (Monday) by the Resolution Foundation.
Spring Forward or Fall Back? looks at the condition of the UK economy ahead of key Brexit votes and the Spring Statement next Wednesday (13 March), and what the various paths for the economy could mean for a crucial Spending Review later in the year.
The Foundation says that the Office for Budget Responsibility (OBR) is unlikely to shift its economic forecasts by much – with a possible modest downward revision to GDP this year likely alongside a modest upward revision to earnings.
However, it adds that three distinct economic questions are emerging – how much lost business investment will return, when and how households will bring their consumption back in line with their incomes, and how the Chancellor will end austerity in the Spending Review later this year while reducing government debt.
Spring Forward or Fall Back notes that businesses have become increasingly nervous since the referendum, and cut back on investment as a result. Annual investment is currently around £60bn lower than it would have been had it grown at the pace normally expected at this stage of the business cycle. A key question for the economy will be how much of this lost investment returns or becomes permanent after a Brexit agreement. The report notes that a further 12 months of uncertainty would reduce business investment by a further £9.3bn – hitting GDP, productivity and ultimately pay.
The report shows however, that while business investment has stagnated since the referendum, consumer confidence has been more robust. Consumer spending per person has increased by £980 a year since the end of 2015, even though income per person has only risen by £140.
However, the report identifies several key warning signs that belie this picture of ongoing consumer confidence. Nearly half (46 per cent) of working-age households (9.5 million in total) say they don’t have enough savings to deal with an emergency. Almost one in five (19 per cent) expect to suffer a ‘sharp drop’ in income over the next 12 months, rising to over one in four (28 per cent) among the poorest fifth of working-age households.
And while the chances of such an income drop remain highly uncertain, the report finds that households’ financial resilience is already being tested. Around one-in-three (31 per cent) working-age households (6.5 million in total) are already displaying at least one sign of ‘debt distress’, including being in arrears on credit and having difficulty in paying for their accommodation.
The Foundation says that the extent to which this business pessimism and consumer optimism lasts will be weighing heavily on the Chancellor as his Spring Statement fires the starting gun on the Spending Review. It calculates that the Chancellor will need to find between £4.5bn and £11bn a year to be able to claim credibly that ‘austerity is over’.
The Foundation adds that providing clarity on Brexit as soon as possible will do more to answer these three major questions facing the UK economy than anything at the Spring Statement, which will take place amid votes in the House of Commons on Brexit.
Matt Whittaker, Deputy Director at the Resolution Foundation, said:
“There are several huge questions hanging over the UK economy – from how much lost business investment will be permanent, how households will bring their consumption back in line with their income, and how the government will both end austerity and reduce debt.
“Next week’s Spring Statement is unlikely to provide much in the way of answers as it will be overshadowed by Brexit. But it will still offer an important moment to reflect on the big questions facing our economy.
“Through the last two years of Brexit negotiations, businesses and consumers have taken very different views on our prospects as a country. Whichever view proves to be right will determine whether it feels like austerity for family and public finances has come to a close in Britain, or whether tough times continue in the years ahead.
“The magnitude of these questions should remind MPs that they are voting not just on their preferred Brexit outcome, but on the future of family living standards and businesses in the years to come.”