How Britain’s post-referendum economy is faring

SINCE it voted to leave the European Union in late June, Britain’s economy has not imploded. The FTSE 250, its main domestically focused stock index, is above its pre-referendum level. The pound, after a few torrid days of trading immediately after the vote, has stabilised. Polls suggest that few Brexiteers regret their vote: indeed, many of them now argue that the pre-referendum doom-mongering was overblown, and some even detect the beginning of a “Brexit boom”. What is the reality?

Certainly, some parts of the British economy are holding up nicely. Retail sales figures for August reported a surprisingly small monthly drop of 0.2%. Even if sales volumes are flat in September, they will grow by 1.5% over the third quarter as a whole. But strong consumer spending is hardly a surprise. Over half the country voted for Brexit, after all, so they should be happy shoppers. And bad economic news tends to have an effect on consumer spending only after a lag: retail sales also grew strongly in September 2008, the month that the financial crisis really got going. 

Look at other parts of the British economy, and things are less positive. Before the referendum, economists’ main worry was that companies would postpone expensive, hard-to-reverse decisions while Britain’s future relationship with the EU was sorted out. The two big questions concern jobs and investment. It is too soon to see an impact in official unemployment data. But the recent deterioration visible in employment surveys points to a sharp slowdown in job growth ahead. On investment spending, things do not look good either. In July the value of contracts in the infrastructure industry fell by 20% compared with June, based on a three-month rolling average. Growth in business credit is also slowing, as firms hold back. The Bank of England’s latest survey of businesses shows that investment intentions have weakened markedly. It is partly for this reason that Philip Hammond, the finance minister, has hinted at a programme of infrastructure investment. The Bank of England, for its part, has cut interest rates from 0.5% to 0.25%, in an attempt to support business lending. 

Economists are split on whether Britain will avoid a recession, though almost all agree that the economy will slow markedly as a result of the vote. The Bank of England had forecast growth of 2.3% in 2017, but now expects just 0.8%. Following the vote to Leave, the government and the bank have been forced to use monetary and fiscal policy just to try to keep growth in positive territory. And Brexit itself, of course, is still to come.

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