Amid all the present political turmoil, how’s the UK economy looking?
Don’t say it too loudly, but it’s doing OK. A bit more than OK, in fact.
That’s despite a range of gloomy predictions from a variety of ‘experts’ that things would be looking dire by now.
So what does the future hold?
Upbeat economic data
As you’d expect from a column called UK Uncensored, we mostly comment on what’s happening on the domestic front. But much as I’d love to write an article about Britain that doesn’t include the ‘B’ word – Brexit – that’s very hard to do.
I’m going to compromise, though. No B-word mentions until later on.
First, let’s look (briefly – promise!) at this week’s UK economic data.
They mainly appeared on Wednesday. And they were better than expected.
February’s manufacturing output was up 0.9%, which compared with a consensus forecast of just 0.2%. Industrial production improved by 0.6% versus a consensus estimate of +0.1%. And overall GDP increased 0.2% compared with the previous month, despite economists expecting no improvement.
Granted, monthly figures can be volatile and later revised. Year-on-year, though, GDP was 2% higher. And construction output, which had been in the doldrums at the end of last year, actually climbed by 3.3% year-on-year versus the 2.4% rise anticipated by consensus.
Even if GDP dipped slightly in March, which could well have happened, 2019 Q1 growth is likely to have improved to 0.4% or even 0.5% versus the previous three months. It all backs up last month’s news that Britain’s jobless rate has dropped to a stunning 44–year low.
In the interests of keeping the stats short, I won’t get bogged down with more data. But you’re getting the drift. Solid figures, if not spectacular.
Sorry, B-word alert: I’ve repeatedly said that Brexit is a political rather than an economic event. Yet some commentators reckon that the February economic figures were as strong as they were because they reflected possible no-deal Brexit planning by UK companies.
Maybe that was partly true. Yet as the experts were already aware about this, it doesn’t explain why the data were so much better than expected.
In any case, compared to the economic gloom that’s descended elsewhere in the world, in particular in Europe (rather ironic!) we’re doing fine.
Looking forward, here I need to issue another alert about using the B-word.
If, after a just-announced delay to 31 October, a so-called ‘soft’ Brexit with a customs union is agreed, it’ll be largely business as usual for British companies.
No, I know we didn’t vote for a lukewarm Brexit, but that’s what happens when a Remain-loaded Parliament is tasked with negotiating our EU exit.
In such a scenario, UK growth could again turn out higher than markets currently expect. It would be boosted by a mixture of fiscal stimulus (i.e. extra government spending) and still-stimulative monetary policy (i.e. continued ultra-low interest rates). I reckon that business investment will recover as well as uncertainty diminishes.
OK, business surveys suggest that British manufacturers could suffer a big output fall in this year’s second quarter. But this sector accounts for only 10% of UK GDP. And the ‘services’ arena, which dominates the economy, looks set fair.
“In our base case where the WA (the UK’s withdrawal agreement from the EU) is ratified just before the end of October, GDP growth should exceed its trend by an even bigger margin next year”, notes Samuel Tombs at Pantheon Macroeconomics, “as capex [capital expenditure] rebounds during the no-change transition period which would run at least until the end of 2020. We expect GDP growth to speed up to 2% next year, from 1.5% in 2019.”
The delay date (or maybe I should call it ‘Delaygate’ as in Watergate mode) is going to prompt a lot of Halloween headlines. Yet despite all the chat, one thing is clear. As spring gets underway, the UK’s garden seems fairly rosy.
But what if Britain ultimately were to leave the EU without a deal (which is still the default position)? Wouldn’t the economy’s wheels fall off?
Of course, we can’t know exactly how the economy would then respond.
Sure, there’d likely be an immediate activity drop as goods flows were disjointed by new tariffs and customs procedures. The pound might suffer a large wobble, although potentially lower interest rates could cut gilt yields. But I reckon overall no-deal fears are overstated.
“Central banks, regulators and banks have had more than two years to prepare for a no deal Brexit”, says Capital Economics. “Banks should continue to lend to each other, firms and households. Of course we would all be bombarded with facts, figures and photos on lorry queues at the ports, the inability of businesses to get their hands on components and the lack of goods on shelves in the shops. The difficulty would be cutting through the noise and quantifying what this means for the economy.”
“We suspect the economy would be fairly resilient. Firms have a clear incentive to get used to new trading systems as soon as possible, which may mean supply chains are fixed and goods start flowing around the economy within a couple of months.”
What’s more, the Bank of England could cut interest rates and – as it’s done before – indulge in more QE (quantitative easing, i.e. debt monetisation). In short, there’d be even more extra cash around than under a soft Brexit. Again, regardless of Remainers’ warnings, business investment would eventually rebound. After a dip, GDP could start to grow again, maybe even to higher levels than under a soft Brexit.
In other words, the end of the Brexit process will be a win-win situation for the UK.
Of course, that’s not the full story. As I’ve written about recently, the real threat to this country’s economy is likely to arrive from elsewhere. If global GDP growth continues to ease, Britain won’t be able to disconnect from this synchronised slowdown. But that’s a topic to be continued another day…