The UK chancellor, Philip Hammond, will deliver his maiden autumn statement against a backdrop of weaker growth prospects, rising inflation and a large deficit.
Scope for headline giveaways will be limited but Hammond is likely to signalmeasures to help so-called Jams – those families who are “just about managing”. Here are five key charts to consider before he stands up.
1. Growth has been steady … but is likely to slow in 2017
Britain has enjoyed steady growth over recent years, with 15 consecutive quarters of expansion. The economy has been more resilient in the months since the Brexit vote than many commentators were expecting. Back in August, the Bank of England was predicting growth of just 0.1% in the third quarter, but it actually came in at 0.5%. It ruled out a technical recession (two consecutive quarters of contraction) in the second half of 2016, as consumers appeared to shrug off any uncertainty resulting from the result of the June referendum.
But 2017 is expected to get tougher as household budgets are squeezed by a combination of rising inflation and weak wage growth. When the then chancellor George Osborne presented his budget in March, the government’s independent forecaster, the Office for Budget Responsibility, was forecasting growth of 2.2% next year. That now looks very optimistic and the Treasury’s independent forecaster will undoubtedly revise the figure down on Wednesday.
2. The UK leads the G7 in 2016 … but not for long
Britain will be the fastest growing of the G7 leading industrial countries in 2016, according to the forecasts published in October by the International Monetary Fund. As the chart shows, the UK economy is expected to grow by 1.8% in 2016, just ahead of Germany at 1.7% and the US at 1.6%. The Washington-based fund admitted its prediction of a post-Brexit-vote crash had proved overly pessimistic.
It’s a different story in 2017, when the Brexit blow begins to be felt and the UK slips down the international league table, with growth of just 1.1%. That would be the slowest rate of annual growth since 2009, when the UK economy shrank by 4.3% in the depths of the financial crisis.
3. Wage growth is weak … and inflation is rising
The financial crisis took a heavy toll on living standards, with real pay falling for six years from 2008 as inflation outpaced wage growth. As the chart above shows, by 2015 things had started to look up for UK consumers. Pay growth was subdued, but inflation was even weaker, providing some respite for households.
But living standards are expected to decline again in 2017 as pay growth remains weak but inflation rises. Consumer price inflation is expected to rise from a current rate of 0.9% to close to 3% next year, as the sharp drop in the value of the pound since the Brexit vote pushes up import costs and feeds into higher prices on the high street.
4. Unemployment forecast to rise from its 11-year low
Unemployment rose after the financial crisis but not as much as feared. After hitting a peak of more than 8% in 2011, the jobless rate has been steadily falling and currently stands at 4.8% – the lowest since 2005.
Economists and policymakers, including those at the Bank of England, are now expecting unemployment to rise as business takes a more cautious approach while Britain attempts to negotiate its way out of the EU. The Bank is predicting the jobless rate will rise to about 5.5% in the middle of 2018.
5. Borrowing expected to be £100bn more than anticipated
The chart above shows the path for the public finances forecast by the OBR at the time of the March budget. That was two months before the UK surprised the world by voting to leave the EU, changing both the economic and fiscal backdrop in the months and years ahead.
The OBR itself said last month its forecast for borrowing of £55.5bn in 2016-17 was “very unlikely to be met”. That point was underlined by the latest figures, which showed the total for the first seven months of the fiscal year to October had already reached £48.6bn (as shown above). But it will have to rip up the forecasts for subsequent years too, taking into account the impact of weaker growth on the public finances.
The chancellor has already abandoned previous plans to return the public finances to surplus by 2019-20. Economists believe the OBR’s revised figures could put borrowing at £100bn more over the next five years than it was predicting in March. The surplus shown in the final two years in the chart above is therefore likely to be erased.
