UK Economic Outlook
Recently published real GDP growth figures for July-September show that the British economy is yet to respond to the Brexit vote on a noteworthy scale (putting aside the impact on the exchange rate. Overall, the economy grew by 0.5% quarter on quarter, down from the 0.7% seen in Q2 but above the consensus forecast of 0.3%. Meanwhile, recent Purchasing Managers' Index (PMI) figures compiled by Markit for the manufacturing sector create hopes that British industry can finish the year on a high. At 54.3 slightly down from September's 55.5, the PMI remains comfortably above the neutral 50-points line that divides expansion in sectoral activity from contraction; new order inflows—both foreign and domestic—expanded for the third straight month, while production levels continued to rise. Looking ahead, Dun & Bradstreet expects the economy to grow by 1.8% in 2016, not too far below the 2.2% seen last year. Nevertheless, we maintain our relatively pessimistic forecast for 2017, forecasting growth of just 0.7% as companies and consumers cut back on spending and investment in particular amid the unfolding Brexit.
Brexit: Short-term Gain for Long-term Pain?
Many critics of the UK’s decision to leave the EU say the only reason people are not feeling any pain is because Brexit has not really started yet. Pending the invocation of Article 50, and with the UK economy posting stronger-than-expected GDP growth in Q3, an alarming underestimation of the negative long-term consequences of Brexit seems to have gradually superseded the bout of initial pessimism seen immediately after June’s vote.
Some metrics of economic performance do indeed suggest that the fundamentals of the economy are solid: for example, domestic output expanded by 0.5% quarter on quarter in Q3. Although this was a little slower than Q2’s 0.7% growth pace, it was still faster than the average forecast of 0.3%, defying experts’ prediction of an economic recession following a Brexit vote. Furthermore, retail trade growth accelerated over the quarter, while inflation is also gradually picking up on account of a cheaper pound (albeit remaining well below the Bank of England’s medium-term target of 2%). September’s forward-looking indicators also bode well for future economic activity, with Markit’s Purchasing Managers’ Index (PMI) for the manufacturing sector rising to its highest level since mid-2014.