No big change yet to outlook for slow-burn UK Brexit vote pain

September 16, 2016

RTSIWCQContrary to now widely-held belief, the rather poor outlook for the UK economy since the country’s vote to leave the European Union on June 23 has barely changed.

The consensus view based on forecasts collected in Reuters polls before the referendum was that if British voters decided to leave the EU, the economy would go from steady, solid growth into a mild recession rather quickly.

This was based on the uncertainty around trade and investment conditions stemming from what was then an assumption, based on a promise by then-Prime Minister David Cameron, that the government would immediately take the first step toward separating from the EU after a vote to leave it.

There has been plenty written since about “doom-mongering” and “Armageddon” forecasts by economists over the impact of the Brexit vote. But the vast bulk of them did not make predictions of this sort at all.

In the Reuters poll taken after the referendum, the median forecast was for a 0.1 percent contraction in the current quarter, followed by another similar contraction in the last three months of the year. That has since been upgraded to no growth in the current quarter and 0.1 percent growth in the fourth.

Here is a chart of the median forecast for Q3 2016 collected in Reuters polls over more than a year.

UK GDP Q3 2016

It is difficult to overemphasise just how routine and miniscule these changes on the lower right side of the chart are compared with the drop from the steady 0.5-0.6 percent quarterly growth forecasts made before the referendum — forecasts made on the assumption Britain would vote to stay in the EU.

And that is what’s behind the problem with all the “doom-mongering” claims.

While the difference between a forecast for 0.5 percent quarterly growth and 0.1 percent contraction is immense – indeed, these kinds of changes in collective thinking taken just weeks apart only ever happen after cataclysmic events like financial crises – a forecast for 0.1 percent quarterly contraction is not in and of itself remotely apocalyptic.

Nearly three months on since the referendum, with no concrete plan from the government or the EU on what each will seek from divorce and how soon this may even proceed has led several banks to upgrade their near-term outlook for the British economy.

This is entirely reasonable. Apart from a plunge in commercial property turnover and prices, a huge spike in import costs for manufacturers owing to the drop in sterling, and a dive and then rebound in business confidence, the economic data haven’t been all that bad.

Accordingly, the probability of a recession in the coming year collected in Reuters polls has fallen to a still not-insignificant 35 percent in the September poll from 60 percent in July.

But that is more of technicality based on the fact that a recession is measured by two successive quarters of shrinking GDP than a sea change in sentiment over the implications of actually leaving the EU.

The widespread view remains that once the government triggers Article 50 of the Lisbon Treaty which orders a two-year stopwatch start on separation negotiations, the economy will feel more pain, but gradually, not in some kind of sharp shock. The latest forecast is for just 0.7 percent growth next year, compared with expectations for steady growth above 2 percent before the vote.

UK GDP 2017

Satirical news website the Daily Mash summed up the all the ink spilled in the British media touting the view everything’s going to be fine perfectly with its headline: “Lack of Brexit effects prove Brexit has not happened.”

Barclays economists upgraded their near-term view on the UK economy on Friday, as several other banks have done in recent weeks. But they also made clear that this was not sounding the all-clear (emphasis from Barclays):

The changes to our forecast today do not alter our view that the UK is heading into a recession and we continue to expect negative quarterly growth in four out of the next six quarters. We continue to believe in a shallow but prolonged recession ahead, driven by investment contraction in the short term and a slowdown in domestic consumption in the course of next year.

Barclays, like many other banks, still expect further stimulus in the form of even lower rates from the Bank of England, as well as fiscal easing from the government in the Autumn statement.

This is to say nothing of the dramatic turnaround in BoE policy — going from focusing on the timing of a rate hike owing to expected inflation pressures from a hot labour market and rising wages to slashing rates and announcing an intent to purchase tens of billions more of government bonds for its previously dormant asset purchase programme.

Barclays analysts call the coming UK recession a “slow fuse.” Others have called the coming pain a “slow burn.” A technical recession may not even happen, at least not for a while.

But Britons will feel the pain from going from expectations for a steady 0.5 percent growth pace over a prolonged period with steady hiring and wage gains to one closer to no growth. It’s just that, like how the divorce will proceed and when, nobody really has any details yet.

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