The Brexit economy: light at the end of the tunnel?

As the one-year countdown to Brexit looms, the British economy is showing signs of steadying from the fallout triggered by the EU referendum, according to a Guardian analysis of economic news over the past month.

After progress with Brussels towards a two-year transitional deal to smooth Britain’s formal exit from the EU on 29 March 2019, the pound has risen back towards the highest levels seen since the leave vote.

Inflation triggered by the drop in sterling after the referendum is finally beginning to fade, just as pay rises begin to come through for workers. But while the Guardian’s latest Brexit dashboard hands support to Philip Hammond’s reasons for feeling “Tiggerish” at the spring statement earlier this month, sharp challenges remain.

With a year to go, there is little progress towards a final deal with Brussels. The uncertainty is putting business investment on hold, while a prospective global trade war triggered by Donald Trump could wreak havoc at a time when a still-fragile British economy needs to strike new relationships elsewhere around the world.

Writing in the Guardian, David Blanchflower, professor of economics at Dartmouth College and a former MPC member, said: “The report card this month shows progress but we could do better. This is a start.”

Having confounded the predictions for a recession made ahead of the referendum vote almost two years ago, the economy has still, however, lost significant momentum – growing at the slowest rate in the G7. There are also fears the “beast from the east” cold snap in the past month could have had a damaging effect on the economy.

Gridlocked motorways, empty restaurants and idle diggers seen across the country are expected to have cost the economy at least £1bn a day and could halve GDP growth in the first three months of the year.

To gauge the impact of the Brexit vote on a monthly basis, the Guardian has chosen eight economic indicators, along with the value of the pound and the performance of the FTSE 100. Economists made forecasts for seven of those barometers before their release, and in four cases the outcome was better than expected.

The latest dashboard shows light at the end of the tunnel for British households, which saw inflation rise well above pay growth last year. The rate of annual growth in prices dropped last month to 2.7% down from a peak of 3.1% last autumn, reaching its lowest level since July 2017. Meanwhile, average earnings grew at their fastest rate in more than two years.

On the high street, retail sales increased for the first time in three months, helped by the drop in inflation. The country’s dominant services sector also staged a recovery last month, although there was a slowdown in manufacturing activity, according to private surveys of business activity watched by the Bank of England for early signs of GDP growth.

Threadneedle Street also signalled interest rates could rise from as early as May. Despite the recent fall in inflation, the Bank still expects the growth in prices to remain above its 2% target set by the government.

Writing in the Guardian, Andrew Sentance, a former member of the Bank of England’s rate-setting monetary policy committee (MPC), said UK inflation remains more than double the 1.2% rate in the euro area, and above the US rate of 2.2%, where the Federal Reserve is already raising interest rates.

“It would not be surprising if the Bank started to follow the Fed’s lead by edging UK rates up again in May,” he said.