Whither the UK economy?

Posted on September 2, 2016

Shoppers pass along Oxford Street in London, U.K., on Friday, July 8, 2016. U.K. retailers had their worst June in a decade as consumers reined in spending ahead of the country's European Union referendum, according to figures from accounting firm BDO. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg

British shoppers hit the high street with enthusiasm in July

Britain’s vote to leave the EU was a shock on many fronts. But a little more than two months after the referendum, the UK economy appears to have recovered its poise better than many analysts had anticipated.

Last week’s retail spending figures showed that British shoppers hit the high street with enthusiasm in July, shrugging off Brexit concerns. This week, the headline manufacturing data for that month emerged well above consensus expectations, hitting a 10-month high, as the Financial Times reports today.

    These are early days and caution is needed in evaluating the state of the UK economy. Monday’s data on how services companies performed in July will be an all-important test because the sector comprises some 80 per cent of the economy. The Treasury also made clear this week that it will wait until the emergence of October’s GDP figures before drawing firm policy conclusions for the Autumn Statement.

    Many market operators, meanwhile, remain pessimistic about the UK economic outlook. While acknowledging this week’s strong manufacturing data, Barclays maintains its view that the UK economy is heading into a mild recession in the third quarter of this year. Economists at Citigroup note that while this week’s headline manufacturing data were strong, large-scale producers cut employment in July, a sign that Brexit may be affecting longer term investment plans.

    Why might the UK economy have performed better than expected in the months since the referendum? Three factors may have helped to boost sentiment.

    One was the speedy emergence of Theresa May in the aftermath of the vote, defying expectations that the Tories would be plunged into a long leadership contest. A second factor may have been the prime minister’s commitment after entering Number 10 to ease austerity. A third may have been the Bank of England’s decision last month to cut interest rates.     

    As a new political season opens at Westminster next week, these benign economic data are helpful for Mrs May. If the economy were showing clear signs of strain, the prime minister would be under pressure to settle business nerves by trying to define what Britain’s post-Brexit future should be. Instead she has the luxury — for now — of keeping her commitments on Britain’s future trading relationships fairly vague. That will be a harder act to sustain if and when the economic costs of Brexit become apparent.  

    Background reading

    As the summer comes to an end and a new political season begins at Westminster, several pieces offer preparatory reading for the months ahead

    Andrew Tyrie, the chairman of the Commons treasury select committee, has written an essay for Open Europe setting out how the UK should approach the Brexit negotiation. Mr Tyrie’s thoughts are the fruits of evidence his committee collected before and after the referendum.

    Robin Niblett, the director of Chatham House, has conducted a similar exercise. He says one of the most difficult decisions for Mrs May will be when and how to see domestic approval for whatever UK-EU framework deal she signs.  

    The FT’s Harriet Agnew and Patrick Jenkins analyse the implications of Brexit for the City this weekend. They describe Brexit as “Big Bang II” for its relationship with the rest of the world. 

    The House of Commons Library this week published a 183-page briefing paper setting out the impact Brexit will have on 20 UK policy areas, ranging from agriculture to higher education. The document conveys the mammoth agenda facing the 200-strong Brexit ministry in the months ahead.  

    Five distinguished Europeans — Jean Pisani-Ferry, Norbert Röttgen, André Sapir, Paul Tucker and Guntram Wolff — have set out a vision for a Continental Partnership between Britain and the EU.   

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