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Time to rewrite the post-referendum economic script

Photos © Joel Chant - www.joelchant.com
UNP- 34198 - Lloyds banking Group
portraits, 10 Gresham St London

Written by Adam Chester, head of economics, commercial banking, Lloyds Bank


FOR those expecting the UK economy to suffer after the EU referendum, things aren’t going quite according to forecast.

Indeed, judging by the sharp rebounds that we have seen across numerous closely-watched economic indicators, it seems that the UK economy is holding up remarkably well.

After an initial plunge, consumer and business confidence reports posted strong improvements, hot on the heels of better labour market, retail sales and CBI reports.

The latest manufacturing, construction and service sector PMIs all rebounded too, with the manufacturing and service sector PMIs posting their strongest monthly gains on record.

The first ‘hard’ economic data since the UK voted to leave the EU saw industrial production rise by a stronger-than-expected 0.1% in July, though it was almost exclusively driven by a close to five per cent surge in mining output.

In contrast, manufacturing output plunged by a sharper-than-expected 0.9% – seemingly validating the steep fall in manufacturing activity reported in various business surveys for July.

Given this, the strong bounce in these surveys over the past month holds out the strong possibility of a large rebound in manufacturing output in August, though the industrial sector only accounts for 15 per cent of total UK output.

So what should we make of this?

Remarkably resilient

Being typical two-handed economists, we would still caution about reading too much into what remains a very limited set of data.

The road to EU exit is a long one with plenty of potential potholes.

Moreover, notwithstanding recent improvements, it is almost certain that UK GDP growth will slow this quarter – if only because of the surprisingly strong 0.6% expansion posted in quarter two.

But with those provisos out the way, we can’t help but be impressed by the resilience of the UK economy.

The 10% fall in the pound since the referendum has provided a significant boost to our competitiveness overseas.

But it isn’t just the export sector that has posted a sharp improvement. The surge in new orders seen by manufacturers, coupled with recent rises in employment, retail sales and consumer confidence, point to a broader strength.

An end to uncertainty?

For us, one of the most telling indicators that provides grounds for cautious optimism is one that ordinarily attracts little attention: uncertainty.

We noted last month that the economic uncertainty index had surged to a record high in July, which would typically be followed by a sharp deterioration in investment and output. But it fell back sharply in August, more than reversing the previous month’s rise.

What has caused this sudden change?

Well, presumably it reflects the changing political outlook, the pre-emptive actions of the Bank of England and, most importantly, the realisation that, to date, the sky is not falling in.

 

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