Economic icebergs in the path of Theresa May’s government

Philip Hammond in Rome

There is a deep split in government over the single market and whether it is a prize worth fighting for.

Brexit

Chancellor Philip Hammond has made it clear he believes the UK needs the same access achieved by the Norwegian and Swiss deals. The minister for Brexit, David Davis, would be content for British firms to pay tariffs to sell their goods into Europe’s markets. With Brussels unwilling to countenance entry to the single market without free movement of labour, May will need to prepare the ground for a relationship based on World Trade Organisation rules in the first phase of Brexit and only later a free-trade deal that mimics the Canadian deal currently going through the European parliament.

Slowing GDP growth

The global economy has slowed for more than a year, hitting trade and investment. China’s attempt to wean itself off manufacturing as its sole source of income has pushed down its own growth and much of the Asia region. Britain’s manufacturing sector has taken the brunt of the decline. Firms in the West Midlands had begun shedding jobs long before the referendum as work dried up. The Bank of England is expected to cut interest rates and inject billions of pounds into the economy at its August meeting, helping to shore up confidence.

Business investment

The biggest economic fear among Remain campaigners of quitting the single market is the potential for foreign investment to dry up. Not immediately, but over a period of years as businesses face investment decisions and, without unfettered access to the single market, favour their EU subsidiaries. Companies most affected will be those that manufacture components in a supply chain where most goods are exported. Brexit campaigners have argued that funds saved from Britain’s EU membership fee could be used to offer cut-price deals to foreign investors, overriding the barriers to the single market.

The pound

The currency has tumbled in recent weeks before settling at around $1.30 and €1.20, around 15% down on the dollar and 10% lower against the euro. The bonus for exporters is that their goods are cheaper abroad, potentially boosting sales. But it’s likely that over the next year higher import costs will feed into inflation and eat into disposable incomes. That will hurt living standards and put the government in the position of cutting taxes or boosting spending to just stand still.

Housing market

House sales have fallen in the last six months and housebuilding growth has stalled. Commercial building has also suffered a slump. Property companies are often considered to be “canaries”: early indicators of economic trouble. In the weeks after the vote they certainly suffered severe share price falls, but have bounced back. House sales remain extremely weak.

Powered by Guardian.co.ukThis article was written by Phillip Inman Economics correspondent, for The Observer on Sunday 17th July 2016 00.05 Europe/London

guardian.co.uk © Guardian News and Media Limited 2010