Politics

Economic strains add to Brexit pressures at EU summit

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Britain’s Prime Minister Theresa May leaves the European Commission headquarters after a Monday meeting with EU Commission President Jean-Claude Juncker and EU’s chief Brexit negotiator Michel Barnier in Brussels, Belgium.

Credit:

Reuters/Francois Lenoir

Cracks are appearing in Britain's economy, putting more pressure on Prime Minister Theresa May as she heads into an EU summit where a breakthrough in Brexit talks appeared unlikely Thursday.

Official data showed that British retail sales fell more than expected in September, against a backdrop of rising inflation largely caused by a Brexit-hit pound.

The UK's annual inflation rate accelerated to 3.0 percent in September, the highest level in more than five years, fueled by rising commodity, food and transport prices, separate figures revealed this week.

Analysts believe the jump could persuade the the Bank of England to lift its main interest rates as early as November.

Even though the country's unemployment remains at a 42-year low, wage growth is failing to keep pace with inflation. 

"In the UK, retail sales wrapped up a week of important economic releases and left us with a bitter taste," says Oanda analyst, Craig Erlam. 

"While the inflation and jobs data may be seen as justifying a rate hike from the Bank of England, today's (retail) data should be a warning to policy makers that the economy is not in a good position to take it," he says.

Should the BoE hike its rate next month as widely expected to 0.50 percent from a record low of 0.25 percent, it would place further strain on borrowers, but boost savers.

Brexit cools spending

The Organization for Economic Cooperation and Development on Tuesday said that reversing Britain's shock Brexit referendum would hand a "positive" and "significant" boost to the economy.

The forecast came as the OECD left its economic growth predictions for Britain unchanged at 1.6 percent in 2017 and one percent next year.

Even British finance minister Philip Hammond last week admitted that UK businesses have reined in spending as Brexit uncertainty weighs.

Hammond told a cross-party panel of MPs that while the economy was "fundamentally robust," companies and consumers were tightening their belts.

Retail sales fell by 0.8 percent in September following a 0.9-percent rise in August, the Office for National Statistics (ONS) said Thursday.

Despite the latest figure, "there is a continuation of the underlying trend of steady growth in sales volumes following a weak start to the year, and a background of generally rising prices," says ONS statistician, Kate Davies. 

UFX.com analyst Dennis de Jong meanwhile said that "five-year high inflation combined with slow wage growth has consumers feeling the pinch."

"With Brexit top of the agenda for the foreseeable future, (shops on) Britain's high streets may well be relying on a Christmas rush to kick start the sector," he said in a note to clients.

PM May meanwhile said Thursday that she wanted EU leaders meeting in Brussels to set out "ambitious plans" for Brexit negotiations in the coming weeks.

"We will be looking at the concrete progress that's been made in our exit negotiations and setting out ambitious plans for the weeks ahead. I particularly want to see an urgency in reaching an agreement on citizens' rights," May said as she arrived for the two-day EU summit.

Ahead of the gathering, EU President Donald Tusk warned Britain not to expect any breakthrough this week, saying London needed to come up with more concrete proposals.

Leaders of the other 27 EU members meeting in Belgium through to Friday are set to postpone until at least December a decision on whether enough progress has been made in talks to move on to discussing Britain and the EU's future relationship.