Brexit's Currency Gift Both Gives and Takes From U.K. Economy

(Bloomberg) -- The U.K. economy is getting pulled in two directions by the Brexit-fueled drop in the pound.

The latest monthly report from the Confederation of British Industry showed that the weaker sterling is giving a big boost to exporters, with factory orders rising at a pace not seen since 1995. That came hours after a Deloitte survey showed how accelerating inflation -- also currency related -- is squeezing consumers and eating into their disposable incomes.

The pickup in prices is already weighing on consumers, with data on Friday showing U.K. retail sales plunged the most in seven years in the first three months of 2017. While the improvement in exports is welcome, the diminished power of the consumer doesn’t bode well for an economy that relies heavily on domestic spending.

Data due April 28 is forecast to show economic growth slowed by almost a half in the first quarter, to 0.4 percent. Expansion is still projected to reach 1.8 percent in 2017, matching last year’s pace.

Deloitte’s report showed consumer confidence weakened in the first quarter and households were the most pessimistic on their disposable income in more than two years. Inflation was at 2.3 percent in March, up from 0.5 percent a year earlier, and may exceed 3 percent later this year. With wage growth stuck below 2.5 percent, that would leave workers with no real income growth.

“Spending has held up well, but with inflation rising and nominal wage growth starting to slow, consumers are beginning to feel a squeeze,” said Ian Stewart, chief economist at Deloitte.

While sterling has rallied since Prime Minister Theresa May called an election for June 8, it’s still down about 14 percent since the European Union referendum in June.

The darker side of that drop could also be seen underlying the CBI numbers, which showed manufacturers’ unit-cost inflation accelerated in the first quarter and firms expect the pace to remain high. That’s going to feed through to consumers, with firms hiking both domestic and export prices at the fastest pace in six years. The CBI survey also showed that investment intentions for the year ahead have softened.

“The weakened pound is a double edged sword for manufacturers,” said Howard Archer, an economist at IHS Markit in London. Surveys “point to a recent robust performance by manufacturers, but the more forward-looking indicators suggest that the sector is starting to find life more challenging.”

Bank of England Deputy Governor Ben Broadbent has called the economy’s current circumstances -- a low pound and continued access to the EU single market -- a “sweet spot” for exporters that may not last. Michael Saunders, another BOE policy maker, said last week that while the long-term effects of Brexit may be detrimental, he sees a rise in exports and stronger-than-forecast growth over the next couple of years.

--With assistance from Ainhoa Goyeneche

To contact the reporters on this story: Jill Ward in London at jward98@bloomberg.net, Fergal O'Brien in London at fobrien@bloomberg.net.

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net, Lucy Meakin, Brian Swint