06:31 GMT13 August 2020
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    British households are worse off following the vote to leave the European Union, according to a leading UK economic think tank.

    An influential British economic forecasting body has revealed that households across Britain are now £600 (US$796) a year worse off after the UK voted to quit the European Union following the Brexit referendum.

    Living standards have already fallen as a direct result of a drop in real disposable income since the start of the year 2017, while at the same time costs have increased as a result of a dramatic drop in the value of the pound, says a report by The National Institute of Economic and Social Research (NIESR).

    Conditions Improving… But Not in Britain

    The gloomy economic outlook in the UK comes against a backdrop of improving conditions elsewhere around the world, where growth is expected to rise by 3.5 percent, while the British economy will only see a 1.6 percent increase.

    "The uncertainty around Brexit, which hasn't happened yet, is already affecting living standards. Consistent with that, real disposable income per head fell by 1.1 percent in the year to the second quarter of 2017 when it would normally be rising," Dr. Garry Young, NIESR director of macroeconomic modeling and forecasting, told Sputnik.

    This is, in fact, the fourth consecutive quarter that real disposable income per head has fallen, he added.

    "Brexit is likely to have affected real household incomes through two channels. First, by slowing economic growth and so reducing the growth of incomes," Dr. Young said.

    "Economic growth has slowed in the UK at the same time that it has speeded up in other countries. This could be because businesses are delaying investment until the future trading relationship with the EU becomes clearer.

    "Second, by pushing up import prices. The pound has depreciated by 17.5 percent since its November 2015 peak and this is pushing up prices, inflation has picked up from 0 percent before the referendum to 3 percent now and some of this is due to the Brexit effect feeding through the exchange rate," the economist said.

    Dr. Young admits it is, of course, impossible to know what would have happened in the absence of the Brexit vote.

    "I would estimate that together, these effects have probably led household real income to be more than 2 percent lower than it would otherwise have been. Average disposable income in the UK is £33,778 (US$44,877) and 2 percent of that is more than £600 ($796)," he said.

    Central to the forecasting body's downgrade in the growth prospects for the UK economy is a more negative view of labor productivity. The efficiency of British workers, as measured by economic output per hour worked, has failed to improve in line with expectations since the financial crisis of 2016.

    Interest Rates Rise?

    With the UK economy only expected to expand by 1.7 percent in 2018 and 2019, the pessimistic outlook comes ahead of a Bank of England (BoE) decision expected on Thursday, November 2, to raise interest rates for the first time in a decade.

    Threadneedle Street — home of the BoE — is expected to increase the cost of borrowing from 0.25 percent to 0.5 percent, reversing the emergency cut immediately after the Brexit vote outcome.

    The rise comes against a backdrop of rising inflation, partly driven by the weak sterling in the wake of the EU referendum while wages are also failing to rise as earlier envisaged. 

    The NIESR says it expects inflation to peak at 3.2 percent before the end of 2017, before falling to 2 percent in 2020 as the Bank raises interest rates again.


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