Brexsplainer: Living standards, wages and prices

Brexit is really a calculation, about whether the short run disruption and undoubted costs in lost trade, output and employment will eventually be made up by boosting UK efficiency and competitiveness

1. What do the experts say will happen to prices after Brexit?

There is a good deal of agreement on this. Most believe that the balance of probabilities is that inflation will now come down from its current rate of just over 3 per cent to towards the 2 per cent target by the first few months of 2020. That is assuming Bank rate goes up to about 1.25 per cent by then – meaning higher mortgages and borrowing costs for many indebted consumers and home-owners.

2. What could go wrong?

On Brexit, a surprise. After all, when the 2016 referendum went against expectations, it pushed the pound down so far as to help push inflation from around 0.6 per cent in the summer of 2016 to the current 3.1 per cent level. Perhaps 1.7 per cent – roughly – is down directly to that initial “Brexit effect”, as well as a reduction and postponement in business investment. Not all of “Project Fear” was exaggerated.

By the same token an unexpectedly hard Brexit could shock markets into another sell-off of sterling, and that would again mean higher prices for imports, and would feed through into the cost of everything from oranges to petrol.

Basically traders and investors are judging that the UK will need much lower export prices in order to keep the economy going – and the quickest way to do that is to devalue the pound.

3. What could go right?

A good Brexit deal might even mean lower inflation than expected, by the same token. Still, global growth is exceptionally strong right now, which is pushing world commodity prices higher in any case, and irrespective of Brexit (so inflation would have risen even after that post-referendum drop in sterling against the dollar, euro et al).

4. What about wages?

This is key, and there’s a kind of “Goldilocks Effect” here. If wages don’t grow quickly, so workers aren’t able to push for higher wages and get them, then living standards may not rise that quickly in the short term, but it would also probably mean more jobs in the medium to long term (and that sort of thing is why the UK is enjoying record employment levels today).

Wages could, though, shoot up. Global demand for UK exports in places such as the US or Gulf- again irrespective of Brexit – could increase the demand for labour and bid wages up to get people it the workplace.

Also of course in some industries there might be a labour shortage, as European workers exit areas such as farm work, construction, health and social care and the hospitality trades. In that case wages might well be bid higher.

The (non-Brexit) effects of the higher living wage, compulsory pensions contributions by employers and the apprenticeship levy would also have to be factored in to an estimate of how labour costs are likely to rise.

However if wage growth squeezes profits or starts to push prices higher in a wage-price “spiral”, then employment and longer term growth will be threatened – and inflation would climb.

So the Bank of England would raise rates to depress demand.

5. What about loss of exports to Europe?

Again that does depend on the kind of deal. If the current expectations for a deal materialise, then trade with Europe and jobs will be hurt even under a “soft Brexit” in the short term. Some workers will need to move from industries serving non EU and the home market from those now exporting to Europe. This may not be easy. As one Bank of England Monetary Policy Committee member put it recently: “A field currently producing barley, sold into the European market, cannot easily or as fruitfully be replanted with olive trees”.

6. Who will come off worst?

In terms of regions, mostly the ones who voted for Brexit most strongly, as leaked government estimates showed earlier this year, plus (pro-Remain) Northern Ireland. London and the wealthier pro-Remain regions will suffer less badly, most agree.

7. What about cheaper food?

The respected Institute for Fiscal Studies examined this last year. They concluded that changes to the exchange rate can have big effects on the price of food, and that poorer households, who spend proportionately more on food than wealthier ones, would be hit harder if the exchange rate fell and commodity prices rose. The poorest 10 per cent of people spend 23 per cent of their income on food; but the richest 10 per cent less than half that proportion.

Again, with global growth moving up then commodities such as cocoa, orange juice, wheat and coffee will be driven higher. Experience in past global growth phases suggest we will also see the cost of chicken and pork rise, with higher demand from China. So in the short term food prices may rise anyway.

8. Why can’t we buy in world markets our food and other essentials?

We can, and that could yield savings, but remember that on current plans the UK and EU will not levy any tariffs on one another – your French cheeses and German salami will not go up for that reason.

Longer term, the benefit of Brexit is supposed to be that from New Zealand lamb and Chinese cars to American chickens the UK can negotiate and buy the cheapest goods from abroad. However, the price we pay might also include having to import chlorinated chickens or genetically modified cereals: a controversial point.

9. Will we be more productive?

The UK should be – because it has to be. In the long run, wages drive living standards and productivity growth raises wages. Famously, and even under EU membership, in recent years UK productivity growth has been disappointing, and so has wages growth.

Proponents of Brexit argue that a radical restructuring of the British economy would boost productivity and thus exports, GDP growth and living standards.

However, if labour becomes relatively dear in the new world, then productivity might go up as industry and commerce use more robots, AI and software to replace humans. That would certainly boost the UK economy’s productivity, but not for all. In such a case, the effects of the higher output per worker will not necessarily be shared equally or equitably (especially if more people lose their jobs).

10. Where will we be in 30 years’ time?

Brexit is really a calculation, about whether the short run disruption and undoubted costs in lost trade, output and employment will eventually be made up by boosting UK efficiency and competitiveness. Even the sharpest economist would find it difficult to speak with much confidence about that. The sheer statistics suggest that it would need a radical re-focus of UK trade to the likes of China and India to make up for slower trade with France, Germany , Belgium, the Netherlands, Ireland and Spain, for example, Much of trade is driven by geography (ie proximity) and habit. Reversing that, even in a digital age, towards a global Britain will take much effort. Pro-Europeans say that we can export to China and India anyway: Brexiters stress the need for new trade agreements to turbo-charge that and pivot the UK towards fast-growing emerging markets, where most global growth will originate over the next few decades.