It’s referendum + 12 days and while it’s become almost impossible to keep pace with political resignations, I’ll try and set out what’s been happening in the economy.
Sentiment in the real economy
We’ve seen from the PMIs that, ahead of the referendum, different sectors of the economy reacted differently to the possibility of Brexit. On the one hand, the polls were pointing to a narrow victory for the status quo, while on the other, (many) economists were forecasting doom if the alternative scenario prevailed. Armed with these ‘predictions’, manufacturing seemed to be keeping calm and carrying on, while the construction sector appeared to be much more in wait and see mode. The service sector was somewhere in between.
While there were some signs of nervousness amongst businesses in June, what’s been the backdrop since? The most significant market development over the past week or so has been the movement in Sterling. This was widely expected to be the first casualty of a leave vote.
There have been numerous statements about the boon to manufacturing this must surely provide, but the reality is rather more complicated. Yes, a drop in Sterling will be a net positive for many exporters, but lots of manufacturing sectors also rely on imported materials and components which wipes out at least some of the benefits. And while there is a benefit today, what about a month from now, or three months from now – something companies pricing longer term contracts have to consider? Exchange volatility is rarely welcomed by industry. And that’s not even taking account of the potential deterioration in demand conditions for UK exporters.
Sterling dropped like a stone on the referendum announcement and has pretty much stayed low. The stock market on the other hand has recovered in recent days, with the FTSE 100 up on the 22nd June. The FTSE 250, is not doing quite as well, due to the larger degree of domestic focussed firms listed. However, there are still some big losers, with bank shares mostly well down over the fortnight.
Forecasters have been quick to switch their economic models off and on again. Predicting the course of growth over the next 18 months has meant going back to scratch on assumptions about the reaction of households and businesses to this new world of uncertainty. One organisation that collates the views of independent forecasters is FocusEconomics. Their rapid reaction report shows that economists haven’t subsequently changed their view that, at least in the short-term, we’re heading into choppy waters.
The average forecast for 2017 now expects UK GDP growth of just 0.3%, with investment posing a significant drag. This is predicted to result in an increase in unemployment by the end of next year.
The policy response
Before I get to a quick recap on what we know, it’s worth looking at how market expectations around monetary policy have moved in recent days. The Bank of England’s Governor’s speech last week gave markets the heads up that further loosening is likely to be in the offing as soon as next week, or on August’s Super Thursday. As for talk of rate rises it’s possible that you could complete a whole undergraduate degree in economics before that’s back on the agenda again.
In light of all of this there have been some positive reactions from government and the Bank of England - the Chancellor dropping his surplus target, commitments to lower corporation tax and a focus on lending to the real economy.
Inevitably, there’s always more the government can do – corporation tax isn’t the only fiscal lever at the government’s disposal. Action on business rates or the annual investment allowance might have a higher or at least complementary impact on the supply chain. A bit of clarity on what’s going on with the apprenticeship levy would be good too. If the fiscal shackles are being loosened, surely we can delay the start date until government has come up with something workable.
Another key ask for businesses is that the status of employees from the rest of the EU isn’t kicked about like a political football. Access to complementary skills is closely connected to investment decisions in the UK, and that’s before you get on to the moral implications of such an important issue.
So that’s where we are after 12 days. We’ll keep blogging on events and what we hear from manufacturers about how business conditions are evolving.