Britain’s high streets are heaving with shoppers despite June’s shock vote to leave the EU. Big companies have reported few signs of distress.
The overwhelming view from economists is that it is too early to know how Britain will cope with years of Brexit uncertainty – but there is a growing belief the country can avoid a recession that only weeks ago was regarded as likely.
On the face of it, the optimism contrasts with ex-prime minister David Cameron’s pre-referendum warning that a Brexit vote would put a “bomb under the economy”.
Retail sales in August reversed much of an immediate post-Brexit vote fall, with retailers reporting their strongest sales in six months, industry data showed last Thursday, partly due to a weaker pound attracting overseas buyers. Official figures out last week showed the number of people claiming unemployment benefit fell unexpectedly in July.
Before the June 23 referendum, the Treasury warned that a Brexit vote would mean higher borrowing costs for homeowners, pushing the economy into a “DIY recession”, and that equity prices were likely to fall. But nearly half of mortgage borrowers look set to gain from the Bank of England’s August 4 interest rate cut, and British equity markets are up.
The British have become poorer than they were before the votes were counted on June 23, and that reality will become clearer as the months go by
Most economists caution these positive signals may have little bearing on the long-term outlook for the economy, which must contend with years of uncertainty as Britain extricates itself from the EU.
New British Prime Minister Theresa May has said she will not trigger the EU’s Article 50 this year, to begin formal talks with the bloc to negotiate the terms of Britain’s exit from the EU and its future trading relationship with the bloc.
“The fact that the UK avoided an immediate crisis does not tell us much about the future,” said Holger Schmieding, chief economist at Berenberg Bank, adding that Britain would probably avoid a technical recession – two consecutive quarters of falling economic output.
Business surveys and some forward-looking indicators of inflation already offer reasons for caution. Price pressures in factories – which feed through into consumer prices – shot higher after the pound’s post-referendum plunge, posing a threat to consumers’ future spending power. Market research firm GfK’s gauge of consumer confidence also fell sharply after the vote. The survey often predicts changes in household spending in the following quarters.
The outlook for the housing market, the bedrock of British consumer wealth, is also unclear: a Reuters poll last Thursday suggested the Brexit vote will have a negative impact on both prices and turnover.
While the mood among economists remains one of concern, it has brightened across financial markets.
Investors were braced for a global economic shock after the Brexit vote, but the FTSE 100 index of UK blue-chip companies is up about eight per cent since the referendum, helped by overseas earnings that will benefit from the pound’s fall in the value. The more domestically focused FTSE 250 index of mid-sized companies is up by about five per cent.
Many big companies have reported little immediate impact from the vote in Britain, including retailers John Lewis and Next, the world’s biggest staffing company Adecco and carmaker BMW. Some major employers like carmaker Nissan say their plans for investment in Britain will hinge on the trade deals it strikes with other countries.
The pound’s fall since the referendum – it was down almost 15 per cent at one point versus the dollar – has benefited some companies; it has boosted manufacturers’ exports, for example. But it also reflects the weaker outlook for the economy.
“In essence, the currency markets are saying that all UK assets are worth less than they used to be,” Rupert Pennant-Lea, a former BoE deputy governor, wrote in the Financial Times. “The British have become poorer than they were before the votes were counted on June 23, and that reality will become clearer as the months go by.”