Well this is awkward. Just as things are starting to look up for the European Union, things are starting to go downhill for the UK, which is in the process of divorcing the bloc.
Britain is one of just two EU economies where the jobless rate is expected to rise between 2017 and 2018, according to the latest forecast by the European Commission, published today. The other is Estonia, a small economy where people are returning to the labor market and wages are rising steadily, making the forecast increase in unemployment—from 7.7% this year to 8.6% next year—less worrying than it sounds.
The rise in unemployment isn’t all bad news for the UK, either. The jobless rate is currently 4.7%, the lowest in 12 years, and it’s much lower than the EU average of 8%. The European Commission forecasts Britain’s jobless rate to average 5% in 2017 and 5.4% in 2018. Still, unlike in Estonia, wage growth in the UK has been weak despite the tight labor market; Bank of England governor Mark Carney warned today that the squeeze on incomes will get worse in the short term.
The UK’s most recent GDP data was worse than expected, and some economists have slashed their economic forecasts in fear that the disappointments will continue. Data published today on UK industrial production and trade were weaker than expected.
Traders reacted to the disappointing data by selling the pound in trading today. The Bank of England decided to keep interest rates at record lows, even as it boosted its GDP forecast for the next two years and said unemployment should remain stable. These predictions, however, are based on a “smooth Brexit.” That’s a big assumption if given how badly the divorce negotiations have started. Almost a year after Brits voted to leave the EU, the economic costs of Brexit—most notably higher inflation—are starting to appear. It will be a “challenging time,” Carney said.