Written by
David Cheetham

Published
14 Oct 2016

Deciding moment for UK economy still to come

14 Oct 2016 • by David Cheetham

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Paradoxically the levels of uncertainty have risen since the vote returned a clear and decisive result and with the widespread feeling that Article 50 won’t be triggered until 2017 at the earliest, this situation is likely to wrangle on for quite some time yet.

After the initial knee-jerk reaction seen on the 24th June, the panic has steadily dissipated and at present there is a remarkably sanguine and serene feeling amongst the markets as a doomsday scenario appears to have been averted. Unfortunately, this seems to be more a case of a break in the storm rather than a safe voyage through to calmer waters and with the Brexit clouds continuing to loom overhead; there remains many challenges to be successfully navigated before this journey may be deemed a success. 

Brexiteers may point to several better than expected macroeconomic releases since the referendum as well as the recovery-turned-rally in the FTSE 100 as proof that the impact on the economy has been less than remainers predicted, but this view is short-sighted in the extreme. In terms of data points the strong Q2 GDP read can be virtually discounted as it focuses almost exclusively on a time period prior to the referendum, and it was clear in the run-up to the vote that the threat of a potential Brexit was having a negligible impact on UK business overall. This was quite possibly due to a general consensus that the vote would come out in favour of the status quo, a viewpoint arrived at by the shock seen in financial markets in the immediate aftermath of the result, which suggests many were caught off guard by the outcome.

One area that did show some weakness leading up to the polling day was the construction sector, with the purchasing managers index (PMI) reading for June showing a large contraction to 46.0 against an expansion of 50.6 expected (these readings are structured so 50 marks the line in the sand between expansion and contraction, with a print above this level signalling growth). However, the other two widely followed PMIs - namely manufacturing and services - both continued to show growth in June. Although the services data -  which is treated as the most significant out of the two - missed expectations, it was enough for the Bank of England to stand pat on their policy at the July meeting. Despite leaving their level of monetary accommodation the same, the accompanying statement following the decision alluded to probable easing at their next meeting when they would have more relevant information on the impact of the vote on the economy. 

Economic releases following this meeting showed there had been a marked slowdown in many areas of the economy in the weeks since the referendum, with all three aforementioned PMIs as well as retail sales figures showing sharp drops. In light of this, the Bank of England announced an aggressive easing of monetary policy with a 25 basis point cut in the base rate at the beginning of August to previously uncharted territory, as well as a resumption of the Quantitative Easing (QE) programme. 

The economic releases in August have come in better than expected, but this is largely due to the combination of depressed forecasts and the pretty shocking numbers for July, which boost the subsequent reading due to the month-on-month nature of the data. Whilst individual data points can give a snapshot of a certain aspect of the economy at a given point in time, it would be remiss to use the last two months of releases to draw a conclusion that the impact of the Brexit is over. Let us not forget that no tangible alterations to the business environment have yet occurred and therefore to expect current conditions to remain for any sustained length of time is an unrealistic assumption.

In conclusion, for Brexiteers to be claiming the decision to leave the EU as an economic victory is premature at best and totally unfounded at worst. Last month’s improving economic releases and the rise in the FTSE 100 - which can be explained to a certain extent by the depreciating pound boosting revenues of companies who conduct their business primarily in currencies other than sterling - are almost irrelevant in terms of attempting to ascertain the long run impact of the Brexit. Until it is more readily apparent what terms our severance from Europe will be on, and when this will occur, uncertainty will remain and therefore the potential for a far worse trading environment than at present will persist as a risk to both UK and European businesses.