Brexit…Update No. 3
It has now been over four months since the EU shattering Brexit vote where the will of the UK citizenry declared themselves free from the constraints of the European Union’s economic shackles.
As many stalwarts of the EU had proclaimed the immediate and disastrous downfall of the UK’s economy based solely on the vote itself…..we figured it was time that we take a brief glance at the latest reverberations that were ignited by that historic vote. You may be somewhat surprised by what we found.
UK economic growth did indeed slow down following the vote in June…but less than predicted. The Office for National Statistics said GDP grew in the UK by 0.5% in the third quarter (July to September), compared to 0.7% in the previous quarter.
Chancellor Philip Hammond stated, “…The fundamentals of the UK economy are strong and today’s data shows that the economy is (quite) resilient.” The Chief Economist for the Office for National Statistics said, “…..There is little evidence that Britain’s vote to leave the EU had a pronounced impact on the UK economy do to Brexit.”
The other notable quotes attributed to the Chancellor were also positive as a whole. “While quarterly growth has fallen slightly, the economy has continued to expand at a rate broadly similar to that seen since 2015 and there is little evidence of a pronounced effect in the immediate aftermath of the vote,” said Hammond. He went on to note that the “dominant” services industries continued to offset “further” falls in new construction while manufacturing “continue” to remain overall flat.
Positive Outcomes Exceeded Negative Expectations!
As a consensus forecast of economists had predicted a “post Brexit” growth rate of just 0.3%. This anemic number had been broadcast daily leading up to the actual vote as an expected result if the UK opted to jettison the EU relationship. In fact, many economists in the UK government had actually indicated that if Brexit carried the day, the country would be “lucky” to see a 0.3% rate of GDP growth! Hence, a growth rate of 0.5% was seen as a welcome surprise.
On a year-to-year basis, growth was also higher than expected, with UK GDP 2.3% higher over the course of the last 12 months, again…..compared to a forecast of only 2.1%. Once again, this was considered an unexpected positive for the economy. Many also saw it as a repudiation of the naysayers who claimed a negative economic impact was almost assured post-Brexit!
While the data obviously makes a positive first statement, as Samuel Tombs of Pantheon Macroeconomics points out, preliminary GDP estimates, due to the very nature of their reporting, often overestimate growth, so that number could easily be revised downwards a bit at the next update.
As inflation has surged higher in the UK as a consequence of the pound’s fall in recent weeks, this may also fuel some future Brexit fall-out. To be specific, inflation hit 1% in October, the first time in close to two years it reached a full measured point. It is possible that inflation may continue to climb as the result of the pounds drop will be fully felt in the months to come. Some economists believe that inflation could eventually touch 3.0% – 3.5% in 2017. As Tombs stated recently, “….the adverse consequences of the Brexit vote will become increasingly clear as (if) inflation shoots up and firms postpone investment over the coming quarters.”
As Coutts Investments has stated, the pound remains the biggest economic casualty so far since Brexit. Since it plummeted in the days following the vote and has languished at multi-decade lows ever since, the result has been the birth of the current rise in inflation. However, Coutts states in their latest investment overview, “…..We think (the) Sterling may be pricing in too much pessimism ——we don’t see a UK recession looming and we believe the longer-term impact of Brexit on the economy would not be disastrous.”
Coutts went on to note, “…..Though the ultimate impact on the UK’s long-term future remains uncertain, we believe currency markets are too pessimistic.” Measured in various ways, the Sterling looks cheap by long-term standards making the UK assets more affordable for overseas buyers. This would be expected to invigorate investments flowing into the UK, thus driving the Sterling higher eventually. While this may take a while as the process of leaving the UK unfolds, it still seems to represent a minimally damaging effect in the long-term.
While much of the complete picture of the Brexit impact is still poised to unfold, there are two very important points to not overlook at this time. First, the UK is still standing. It did not vanish in a black puff of smoke and in fact, it so far seems to be weathering the storm quite well. One must always remember that the British are a tough lot. They have always been a proud people and are not easily brought to their knees. Second, the real test will be when Prime Minister Theresa May begins the actual technical process of “unspooling,” the UK from the EU. IF, that surgical procedure is done with great skill it will no doubt minimize the potential negative outcomes many believe are still on the horizon. As in any complex procedure…the operation can be a success…but you can still lose the patient.
Only time will tell… if GOD and Theresa May can save the Queen!