The Brexit effect: UK economy grows at 5-year low in 2017

LONDON (AP) — The British economy grew at its slowest rate in five years during 2017 as consumers and businesses were held back by factors directly related to Brexit.

Armed with more information following an initial estimate, the Office for National Statistics said Thursday that the British economy expanded by only 0.4 percent in the October to December period, down from 0.5 percent before, largely because of lower than anticipated industrial production.

The downgrade reduced overall 2017 growth to 1.7 percent, its lowest since 2012, and confirmed that Britain is one of the slowest-growing Group of Seven economies. Before the June 2016 vote to leave the European Union, it had for years been one of the fastest-growing.

Though Brexit isn’t officially due to take place until March 2019, the vote to leave the European Union has clearly hit consumers and businesses.

The former have been constrained by a sharp rise in inflation that was due to the fall in the pound following the referendum. The depreciation raised the cost of imported goods, notably food and energy. And the increase in inflation has eaten into wages, reducing purchasing power. Household spending grew by 1.8 percent in 2017, its lowest since 2012.

In a statement accompanying Thursday’s downward revision, agency statistician Darren Morgan noted that a number of consumer-facing industries slowed “as price rises led to household budgets being squeezed.”

That squeeze on household incomes is due to end this year, according to Bank of England Governor Mark Carney, as wage rises are forecast to start to outstrip inflation. Currently, wages are growing about 2.5 percent on average against price increases of about 3 percent.

But the softer growth is not just about consumers. Businesses, too, have taken a more cautious approach on investment as they seek clarity over the post-Brexit economic landscape. Business investment during the fourth quarter was flat when compared to the year before, a sign of the impact of Brexit uncertainty.

With little more than a year to go to Brexit, executives will be hoping for some clarity to emerge over the coming days. On Thursday, Prime Minister Theresa May is hosting some of her top minister at her country retreat in an attempt to forge a consensus over the way ahead.

“There is the potential for business investment to pick up significantly over 2018 and 2019 if the Brexit negotiations deliver further clarity to firms regarding the U.K.’s future economic position,” said Pablo Shah, an economist at the Centre for Economics and Business Research.

Discussions over the trading relationship between the government and the EU are due to resume soon, and many businesses, particularly in the finance sector, are hoping that a transition deal will be agreed on shortly whereby Britain will remain in the tariff-free European single market and customs union for a period after Brexit.

Though the impact of the falling pound is set to diminish over the year, Brexit is still the biggest cloud over the economic horizon this year.

“The effect of the uncertainty around future trading relationships is having an impact on the demand side of the economy,” Carney told lawmakers Wednesday. “I don’t think that’s controversial, it’s pretty clear … We have moved from the top of the pack to the bottom.”

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