- Samuel Tombs / Pantheon
LONDON – The opinion polls could not have been easier to interpret: Theresa May was going to win the June 8 general election.
The Conservatives would increase their majority in the House of Commons by up to 100 seats. And Jeremy Corbyn would fare so badly that the Labour party would – again – be forced to address whether it really had the right man in charge. (Full disclosure: Business Insider’s poll was one of the wrongest of them all.)
Of course, none of that happened.
But there was one analyst, Samuel Tombs of Pantheon Macroeconomics, who argued that Theresa May was actually in trouble. Since May 19 – more than three weeks before the election – he had been advancing the case that May was not, in fact, sailing to victory.
He predicted “only a slender Tory win” and that “they won’t improve much on 2015’s result,” which was a narrow majority of just 12 seats. As Business Insider reported last month, Tombs’ prediction was based on the rough correlation between consumer confidence and the seat-majority of the ruling party after any given election.
Consumer confidence tumbled since the election in 2015, and Tombs couldn’t see May’s seat majority going in the opposite direction.
Of course, Tombs was right and everyone else was wrong. May lost her majority, after 13 seats were taken by Labour and other parties, leaving the Tories as the largest single party in a House with no overall majority.
Given that the UK is now sailing into uncharted territory: Trying to extract itself from the European Union and emerge with a trade deal before the end of 2019, a timeframe no one believes is possible, we decided to ask Tombs where he thought the economy was headed next.
- Pantheon Macroeconomics
It’s not good news.
“I think now we are starting to see clear evidence that the Brexit vote has been bad for the economy,” he says. “We’re seeing inflation shoot up, wage growth start to deteriorate, and that’s really now starting to slow the economy. … First quarter GDP increased by just 0.2%, the weakest growth we’ve seen for three years. So far at least it looks like Q2 isn’t going to be any better than the first quarter.”
“By and large I think the main reason why the economy is slowing right now is because of Brexit, because of that sharp depreciation of sterling, it’s been a net negative to the economy so far.”?
Many economists predicted a downturn after the Brexit vote and, famously, the economy did the opposite: As sterling fell, exports rose, and the UK economy performed well in the following two quarters.
- Pantheon Macroeconomics
But now the Leave honeymoon is over, Tombs believes.
“There was initial resilience in the economy immediately after the Brexit vote, partly because the Bank of England cut interest rates rather quickly and that immediately fed through to people’s mortgage payments and released some extra disposable income … and acted as a stopper, to use credit to undertake some big ticket purchases early, they realised that prices would rise as a result of the exchange rate this year.
“And so in 2016 they actually used credit to bring forward some private expenditure which saw big-ticket items like car sales pick up, other household goods that are high-value … and that really supported the economy.”
Now the decline of the pound is starting to bite, Tombs believes, and the UK economy is not prepared to deal with it.
“What we haven’t seen this year is any rebalancing of the economy towards net trade or investment, as had been hoped when they depreciated sharply. So there was hope that although consumer spending would be hit by the weaker exchange rate, at least we’d get some impetus to growth and net trade. In fact, sterling started to depreciate at the start of 2015, we’ve seen net trade drag on growth, and the real problem is that the UK economy’s still very dependent upon imports, it can’t wean itself off imports overnight, and also exporters have hiked their prices significantly over the last year or so such that if you’re a foreign customer you haven’t seen any improvement in the competitiveness of UK goods so far.”
- Pantheon Macroeconomics
One thing you’d want to see in an economy with a devalued currency is exporters taking the extra margins they earn on foreign sales to reinvest here in the UK. But that is not happening. Instead, companies are simply parking the extra cash offshore, Tombs says.
“They’re not spending it, they’re not investing it, they’re just storing it overseas in bank accounts at the moment, taking a very cautious approach. Obviously, exporters face a lot of uncertainty right now as a result of the Brexit vote, so they’re not pitching any long-term investment decision.”
That’s the big risk for the remainder of the year, Tombs believes. That the Brexit dividend inherited by exporters in the form of a devalued pound is wasted, and the political uncertainty surrounding Brexit becomes a concrete bar to new investments in the real economy.
“That hope that you’d see a rebalancing of the economy towards net trade and investment because of that exchange rate just hasn’t come through. And so although the economy did show some initial signs of resilience after the Brexit vote, that really was just continued strength of consumer spending before this inflation shock hit. Now that the inflation shock has hit, the UK economy doesn’t really have much left to propel growth this year.”?