BREXIT: An unbiased update and analysis

Last week, two of the UK’s leading economic forecasters concluded that Brexit is unlikely to cause a sharp slowdown in UK growth over the next three years. This is big news.

In the weeks after the referendum, talk of the UK falling into recession was rife. Economists slashed their UK growth forecasts. By August last year, economists expected GDP growth would fall away in the second half of 2016 as Brexit hit home. They saw the UK eking out meagre growth of 0.6% in 2017, the slowest since the recession in 2009. Instead activity accelerated from the middle of last year and for 2016 as a whole GDP growth came in at 2.0%, the best of any major industrialised nation. Consumers kept spending and borrowing in the second half of 2016 and the services sector saw good growth.

Further, last autumn the focus of market concern shifted to 2017 and three Brexit-related risks – from higher inflation hitting consumer spending, the effects of uncertainty on business investment and, in March, the triggering of Article 50. It is important to note that these risks remain, but the scale of the threat they pose has reduced.

 The main reason why we can see these risks reducing come from the UK’s most venerable independent economic forecaster, the National Institute of Economic and Social Research (NIESR). They forecast that UK activity will slow only marginally, from 2.0% in 2016 to 1.7% in 2017, with growth then picking up to 1.9% in 2018 and 2.1% in 2019. In these forecasts Brexit triggers the long-awaited rebalancing of growth in the UK economy from consumption to exports. A weaker pound makes exports more competitive and imports more costly. The result is a marked shrinkage of the trade gap with the current account balance narrowing to the lowest level in 20 years by 2018. Brexit, ironically, could be a catalyst for making the UK economy more, not less, export-focused.

 The Bank of England also expects there to be no slowdown in UK growth this year, with the economy growing by 2.0%, followed by 1.6% in 2017 and 1.8% in 2018. The Bank sees consumers bolstering spending power this year by saving less and borrowing more. In the market, we have seen that UK manufacturing activity grew in January at its fastest rate in two and a half years (although the pace of service activity slowed), and the UK consumer resilience Deloitte’s Q4 Consumer Tracker shows consumer confidence higher now than a year ago.

 However, it is almost certain that the UK economy will not get through Brexit scot free. The Bank and the National Institute expect UK growth to be weaker over the next three years than was widely expected ahead of the referendum. The Bank and the Institute see an average UK growth rate around the 1.8% mark for each of the next three years. That compares with market expectations of average growth of 2.1% in April. This, taken at a macro-level, is a modest derating of medium term growth compared to what many feared. Two of the UK’s leading economic forecasters now think the period which starts with the triggering of Article 50 and ends with the UK’s departure from the EU will be one of continuing growth. Further evidence is that the euro area growth accelerated to 0.5% in Q4, which underscores the point on resilience in in the face of political uncertainty.

There is an argument that says if post-referendum forecasts for UK growth were so wrong why should we place so much weight on these forecasts. Maybe they are too rosy, just as last summer’s forecasts were too pessimistic. It is a fair point. But three factors support a more optimistic interpretation of the effects of Brexit than seven months ago:

• First, the actual performance of the UK since the vote and has been solid. The knowledge that the UK is leaving the EU has not induced a “Lehman”-style deterioration in confidence. In reality, the FTSE 100 equity index ended last week up 0.7% at 7,188, quite high in recent times.
• Second, financial conditions remain benign. There has been no big hit to financial markets, credit conditions are favourable and, in a sign of confidence about future growth, investors have been buying equities. All of the risks were greater at the time of the referendum irrespective of the vote happening or not.
• Third, the global economy, and therefore demand for British exports, is in better shape than it was last summer. Euro area growth accelerated into the end of the year and in January business confidence in the region hit a six year high. The US Federal Reserve is sufficiently confident about America’s recovery to signal that US rates will rise further this year. 

In terms of the political landscape, a few area of interest are being shown. British MPs voted 498 to 114 in favour of the government invoking Article 50, beginning the process of exiting the EU - perhaps a reflection of MPs reflected the wishes of their constituents where more and more “Remainers” have accepted the result and now want to make the most from it, this can be supported by the Conservative peer and prominent Remain supporter Jonathan Hill urging Remain and Leave supporters to come together to discuss the practicalities of Brexit. The government has published a Brexit bill (a rather brief 137 words) setting out its negotiation goals and in response, MPs have tabled more pages of amendments to the Brexit bill than there are words in the original bill itself – 142 pages. Undoubtedly, some of these amendments are reflective of a group of MPs attempting to slow the process.

In summary, none of this is to diminish the historic nature of Britain’s departure from the EU, nor the risks and uncertainties ahead. But, seven months on from the referendum, fears that Brexit will lead to a collapse in Britain’s growth rate have eased.