London - The UK
economy is getting pulled in two directions by the Brexit fuelled drop in the
pound. The latest monthly report from the Confederation of British Industry
showed that the weaker sterling is giving a big boost to exporters, with
factory orders rising at a pace not seen since 1995.
That came hours after a Deloitte survey showed how
accelerating inflation -- also currency related is squeezing consumers and
eating into their disposable incomes.
The pickup in prices is already weighing on consumers, with
data on Friday showing UK
retail sales plunged the most in seven years in the first three months of 2017.
While the improvement in exports is welcome, the diminished
power of the consumer doesn’t bode well for an economy that relies heavily on
domestic spending.
Read also: UK economy sending out mixed signals
Data due April 28 is forecast to show economic growth slowed
by almost a half in the first quarter, to 0.4 percent. Expansion is still
projected to reach 1.8 percent in 2017, matching last year’s pace.
Deloitte’s report showed consumer confidence weakened in the
first quarter and households were the most pessimistic on their disposable
income in more than two years. Inflation was at 2.3 percent in March, up from
0.5 percent a year earlier, and may exceed 3 percent later this year. With wage
growth stuck below 2.5 percent that would leave workers with no real income
growth.
“Spending has held up well, but with inflation rising and
nominal wage growth starting to slow, consumers are beginning to feel a
squeeze,” said Ian Stewart, chief economist at Deloitte. While sterling has
rallied since Prime Minister Theresa May called an election for June 8, it’s
still down about 14 percent since the European Union referendum in June.
The darker side of that drop could also be seen underlying
the CBI numbers, which showed manufacturers’ unit-cost inflation accelerated in
the first quarter and firms expect the pace to remain high. That’s going to
feed through to consumers, with firms hiking both domestic and export prices at
the fastest pace in six years. The CBI survey also showed that investment
intentions for the year ahead have softened.
“The weakened pound is a double edged sword for
manufacturers,” said Howard Archer, an economist at IHS Markit in London. Surveys “point to
a recent robust performance by manufacturers, but the more forward-looking
indicators suggest that the sector is starting to find life more challenging.”
Bank of England Deputy Governor Ben Broadbent has called the
economy’s current circumstances a low pound and continued access to the EU
single market a “ sweet spot” for exporters that may not last. Michael
Saunders, another BOE policy maker, said last week that while the long-term
effects of Brexit may be detrimental, he sees a rise in exports and stronger-than-forecast
growth over the next couple of years.
BLOOMBERG