Is the post-Brexit economy 'so far, so good' or 'wilting fast'?

Jul 22, 2016

First major reports into UK after the EU referendum result point to substantial slowing of activity in July

JUSTIN TALLIS/AFP/Getty Images

Page 1 of 30Is the post-Brexit economy 'so far, so good' or 'wilting fast'?

After all the economic warnings by the Remain camp ahead of the EU referendum, observers on both sides of the divide are waiting for concrete signs of the actual effects of the shock Leave victory last month.

In the meantime, they are busily interpreting, often in sharply contrasting fashion, the anecdotal or sentiment-based reports published in the past couple of weeks.

The likes of Allister Heath, the pro-Brexit deputy editor of the Daily Telegraph, have concluded it is "so far, so good for the post-Brexit economy", which has proven to be "remarkably resilient".

Heath cites a business update from TSB saying there had been a decline in mortgage demand in the days after the referendum result, but "by less so than when England were still in Euro 2016" and "by Tuesday, mortgage activity had almost returned to normal".

He also quotes the findings of a Bank of England survey of its nationwide agents that two-thirds of firms are pressing on with plans as normal and there is "no clear evidence of a sharp general slowdown".

Overall, he says, there are many reasons to be cheerful: the economy was growing well in the lead up to the vote; a majority of the electorate are pleased with the outcome, and the banking sector is in "unrecognisably better shape" than it was before the financial crisis in 2008.

However, the first real data points since the referendum were published this morning – and they make for grim reading.

Markit's purchasing managers' indices says the composite reading across the economy slumped from 52.4 to 47.7, the lowest since April 2009, reports Reuters. If this rate were to persist throughout the third quarter, it would equate to a contraction of 0.4 per cent.

The services sector saw its fastest ever fall from to 47.4 from 52.3, while manufacturing held up slightly better as the slump in the pound boosted exports, falling to 49.1 from 52.1.

Does this data mean optimists such as Heath are wrong? Not necessarily: Markit asks bosses for information on orders and cancellations, but its data remains largely sentiment-driven. The Bank of England's earlier study suggested confidence was falling more than actual activity.

Markit also said the "flash" survey, taken among a smaller sample and in a narrow window between 12 and 21 July, reflected an improvement in sentiment after political uncertainty was brought to an end with the early appointment of Theresa May as prime minister. 

"Given that the… surveys were conducted in the immediate aftermath of the referendum, the PMIs may well stabilise or pick up in coming months as the dust settles," said Ruth Gregory of Capital Economics.

Brexit has cost us £40m in weeks, says easyJet

21 July

Budget airline easyJet has declared itself a big loser following the shock Brexit vote last month, saying the result has driven up costs and contributed to a squeeze on margins.         

In particular, the pound's ten per cent slump against the dollar has increased the cost of oil, which is denominated in the US currency, and caused the airline's costs to soar by £40m in just a month, the BBC reports.

In addition, easyJet's trading update revealed it is earning less per passenger, as the drop in sterling means it is booking less profit per seat sold.

It has been further squeezed by what chief executive Caroline McCall termed an "extraordinary number of external events", including last week's terror attack in Nice, the latest in a string of atrocities in the past couple of years, and the upheaval in Turkey following the attempted coup.

Such events make people less inclined to take holidays or to avoid previously popular destinations, leading to airlines and travel operators having to discount heavily to hold up passenger numbers.                                                  

Such is the uncertainty that easyJet was not able to offer guidance on likely profit for the year ending September, as it usually would at this time of year.

Analysts now expect pre-tax earnings of £596m, 14 per cent and 20 per cent respectively less than last year and upbeat forecasts from last November, says Reuters.

The vote for Brexit has created a range of business winners and losers, mostly split down currency lines. In short, those that earn money abroad and convert back into the weak pound have gained, while those that buy supplies overseas and earn money at home are suffering.

However, that is not to say that easyJet is pessimistic. Pointing to a rise in passenger numbers to 20.2 million for the past quarter, McCall said cheaper seat prices should boost its customer base further.

The company also insisted it would "continue to grow in the UK" and would not shift away from its Luton headquarters regardless of the outcome of the EU exit negotiations. 

'No clear evidence' of sharp post-Brexit economic slump

20 July

"No clear evidence" exists that the UK's vote for Brexit last month has triggered a sharp slump in economic fortunes, says the Bank of England (BoE).

In a keenly-awaited survey reflecting evidence gathered by agents around the country, who act as the BoE's "eyes and ears" on the ground, the bank said companies are more uncertain but are mostly ploughing ahead with expansion plans.

A third of firms say they will curb hiring and investment relative to pre-referendum intentions, but the rest are unaffected and a majority still intend to fund growth initiatives. Consumer spending also appears to be mostly unaffected, added the report.

The Daily Telegraph reports that business uncertainty has "risen markedly", but says a "majority of firms… [do] not expect a near-term impact" and there is "no clear evidence of a sharp general slowing in activity".

In addition, official figures today showed a fall in UK unemployment between March and May, in the lead up to the EU referendum, to 4.9 per cent, a new 11-year low. Analysts had expected pre-vote uncertainty to prompt a rise.

There was an increase in a more recent figure for jobless claims in June, which were up 400 to 759,100, but even this undershot expectations.

Chancellor Philip Hammond said the report, which also found record employment and steady wage growth of 2.3 per cent, pointed to the "strong fundamentals" of the UK economy.

"While the decision to leave the European Union marks the beginning of a new phase for our economy, the message we take to the world is this: our country remains open for business and we are the same outward-looking, globally-minded, big-thinking country we have always been," he said.

Today's positive reports fly in the face of the latest forecast from the International Monetary Fund, which Sky News's Ed Conway says paint an "unflattering picture of the UK economy". 

While it predicts the UK will avoid a recession, the IMF is now pencilling in a fall in growth from 2.2 per cent to 1.3 per cent next year and as low as minus 0.8 per cent under its "adverse scenario".                 

Global growth is also expected to fall by 0.1 per cent as a result of Brexit, hitting 3.4 per cent.

Infographic provided by Statista for TheWeek.co.uk

Brexit fallout: Campaigners raise £27,000 to prosecute Leave politicians

19 July

crowdfunding campaign aiming to prosecute "dishonest Brexit politicians" has received more than £27,000 in donations.

BrexitJustice says Leave campaigners including new Foreign Secretary Boris Johnson, former justice secretary Michael Gove and MEP Nigel Farage should face charges of "fraud, misconduct in public office, undue influence and, possibly, inciting racial hatred", reports The Independent.

"Our politicians do not fear lying to us because we have not made enough effort to bring justice to them for doing so," said BrexitJustice founder Marcus Ball.

The campaign has also criticised the Vote Leave battle bus, which was emblazoned with the slogan: "We send the EU £350 million a week. Let's fund our NHS instead. Vote Leave", citing it as typical of an argument "built on ignorance and emotion, not evidence".

Brexit campaigners have since backed away from the pledge to spend that sum on the NHS.

Greenpeace yesterday overhauled the bus to replace the "lies" about EU funding with demands for the "truth" in a protest outside Westminster, reports the Daily Telegraph.

Last week, Labour MP Chuka Umunna launched "Vote Leave Watch" to hold Brexiters to account for their referendum promises.

Brexit vote to cause 'horrible' economic slow-down

18 July

There are further predictions that the decision to leave the European Union will spell disaster for the UK economy, with growth slowed or even reversed.

Economic confidence has been drastically undermined and Brexit, when it happens, will be "horrible" for the economy, according to financial forecasters the EY Item Club and a leading fund manager.

The Item Club, an independent financial think-tank founded by financial advisers Ernst & Young, last night issued pessimistic new economic forecasts warning of "severe confidence effects on spending and business investment", says the BBC.

It previously expected the economy to grow by 2.3 per cent in 2016, but has reduced this to 1.9 per cent, while its estimated 2.5 per cent for 2017 has been cut to just 0.4 per cent.

However, the Club is predicting a slight recovery in 2018, for which it has scaled down its expectations from 2.8 per cent to 1.4 per cent.

As Brexit goes ahead, unemployment is also forecast to rise from five per cent to 7.1 per cent by the end of 2019.

"Heightened uncertainty is likely to hold back business investment, while consumer spending will be restrained by a weaker jobs market and higher inflation," said the Club.

"Longer-term, the UK may have to adjust to a permanent reduction in the size of the economy, compared to the trend that seemed possible prior to the vote."

There is a "silver lining" for exporters, with a weaker pound making their products more attractive to buyers overseas.

Meanwhile, leading fund manager Richard Buxton says Brexit could lead to a recession. The OMGI chief executive told The Guardian that leaving the EU was "absolutely going to be horrible" and that the economy would "judder to a halt" or go into a "mild recession" on the back of the vote.

Looking further ahead, Buxton predicted the government would ease off on taxation to try to cushion the impact on taxpayers. But the "bigger question" was whether they would be bold enough to invest.

"If [the government] can borrow at a ludicrously low rates through extensive debt issuance, then let's do so, specifically to invest either directly or alongside private investors in infrastructure projects," he said.

Brexit vote 'could lead to short-term UK recession', says investment titan

15 July

Britain's shock vote for Brexit means the country faces a sharp slowdown and very probably a "short-term" recession, says Blackrock boss Larry Fink.

The warning from the chief executive of the world's largest asset manager follows discussions with a range of business leaders last week, all of whom said they were cutting investment. 

"No one said they would cut any jobs, they just don’t see capital expenditure or job creation in the UK and if they need to add jobs, it will have to be on the continent until there is more certainty," Fink told the Financial Times.

He expects GDP growth to fall by around two per cent to "plus or minus half of one per cent". The country would be in recession if it recorded two consecutive quarters of negative growth.

While Fink told CNBC that any recession would be "short-term", his words chime with warnings from economists and Remain-supporting politicians prior to the EU referendum.

At the time, notes The Independent, the Treasury said there would be 520,000 more people out of work by 2018 in the event of a vote for Brexit, while wages would be 2.8 per cent lower and house prices stagnant and ten per cent below where they might have been.

Such warnings were successfully dismissed as "Project Fear" scaremongering by the Leave camp.

However, yesterday, Credit Suisse issued a range of post-Brexit forecasts predicting GDP would fall to minus one per cent in 2017 and that the jobless rate would rise from five to 6.5 per cent, adding around 490,000 to the unemployment total.

Experts are also generally predicting house prices will fall by around five per cent in the coming year or more.

In contrast, Next boss and prominent Leave supporter Lord Wolfson sounded a more optimistic note yesterday, telling the BBC the fall in the pound would boost investment by more than currently anticipated and that public spending would hold up.

In addition, new data compiled by recruiters Morgan McKinley found around 17 per cent more jobs had been advertised by City financial firms in June than May, many of which came in the week after the referendum result was announced.

Page 1 of 30Is the post-Brexit economy 'so far, so good' or 'wilting fast'?

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