There’s been a slew of barely-worth-reading media articles outlining how the UK economy has kept up surprisingly well in the face of Brexit.
The response in other parts of the media, and on social media, has been harsh and predictable. Paraphrasing, it goes:
D’uh. We’re still in the EU. Theresa May hasn’t invoked article 50. The shit is yet to hit the fan.
I think that point makes sense on some level. But it strikes me as firmly first order thinking. It unavoidably assumes that consumers and companies are not anticipatory. That it’s logical that they’ll go on with their merry former ways until such day as May drops the bomb or even until the UK actually departs the EU a few years later. It assumes that the smug tweeter knows something—that the excrement will soon meet the fan—that is lost on all those hapless consumers and companies.
Here’s what we expected after the Brexit referendum got up. We expected consumer spending to drop sharply, we expected business investment to drop sharply. Thus we expected a recession fairly promptly, despite the fact that pulling out of the EU was a way off.
Early numbers good
So the strong consumer spending numbers released in recent months have been a surprise to us. We won’t see reliable business investment data for a while yet, so we’re unsure where that stands. Our expectation is still for a drop off, but perhaps we’ll be wrong there too.
There are certainly pockets of obvious weakness. We’ve talked with several realtors in recent weeks. Housing transaction volumes, in London in particular, dropped off a cliff post-referendum and haven’t bounced in the slightest yet. In the realtors’ telling, buyers are demanding a 10-15% discount as a result of the impending Brexit. Sellers generally won’t give it to them. It’s going to take a while for the two to meet, probably at prices somewhere in the middle. Share prices of UK real estate agents are back at or below their late-June lows.
But, all up, I’m surprised by the resilience of recent economic numbers. They’re very early. They might mean nothing. Brexit hasn’t happened yet. We don’t even know what form Brexit will eventually take. The odds are increasingly moving towards a so-called hard exit. But consumers and companies aren’t daft enough to have missed that it’s lurking up ahead.
4 thoughts on “Brexit: Better Than Expected…So Far”
Hi Gareth, a great article in by Matt Ridley in today’s paper (p.8 The Aust.) on the comparative advantages the UK has, especially in value adding areas such as law, banking, advertising, higher education, design, research etc. I found it a pretty compelling case e.g. 7 of top 10 accounting firms headquarters in UK (only 1 elsehwere in EU; 3 of top 10 uni’s versus none in EU; 5 of top law firms versus none in EU etc).
I think he also touches on the over-regulation that the EU imposes and hence why it does not do that well in trading with other nations.
I personally think the UK will fly because it is now independent and sovereign over its own affairs again.
Despite all the talk of a hard Brexit, I don’t think so. The EU (organisationally and conceotually) is in a parlous state despite all the posturing from Brussels while the UK not so. If you doubt that just ask yourself a few simple questions on its protectionist agricultural policy. It ties the EU countries (esp. France) to welfare/socialist farming which will come to a bitter end when the money runs out. And that hasn’t mentioned the fraud and corruption it encourages.
We have a tendency to think that others share a similar paradigm to ourselves.
I suspect that what has happened here is that, as a group of anticipatory individuals in an anticipatory vocation, you have been surprised by the difference between your collective paradigm and the broader paradigm of the participants in the British economy.
My view is that people are generally far less anticipatory than you give them credit for, and so, in this instance, it may be that first order thinking beats the more iterative ways of thinking about this issue.
Another point is that as an economy that has been suffering from economic malaise for almost a decade now, there is every possibility that the Brexit vote has simply muted Britain’s recovery, rather than causing a recession. That is, if, in a parallel universe, Britons had voted to stay in the EU, then perhaps the parallel Gareth would have been writing a 4 October 2016 blog post on the surprisingly strong and sudden recovery in the UK economy.
The fact that there are no control-conditions in history entails that it is very difficult to conclusively attribute causation to a specific variable.
The stimulatory impact of a 10% depreciation in the pound is something that is worth bearing in mind also. Whether it’s enough to offset weaker investment remains to be seen – probably not in my view – but it could be. Export-oriented sectors will likely be picking up speed at the moment. London real estate is now also 10% cheaper in USD merely on account of the GBP’s depreciation, while the BoE has slashed rates and it looks like a significant reduction in mortgage rates is coming. Indeed, this is one reason why GS downgraded Lloyds of late, as it will likely compress bank margins further. However, more cheap money will likely soften the extent of the real estate downturn, if not forestall one entirely.
On the consumer side, there is very likely a ‘life goes on’ attitude at play. Corporates will be forward-looking with their investment intentions, to be sure, but for the average British consumer, as long as they have a job, income, stable house prices, and falling interest rates, there is probably no compulsion to materially alter behaviour.
It’s also worth bearing in mind that there may even be long term positives associated with Brexit. The EU is a bureaucratic and unwieldly institution, and its mandated economic policies are far from what all economists would universally agree to be optimal. Brexit will grant the British greater freedom to implement more market-friendly reforms. A loss of market access is a risk, but will likely be navigated over time IMO.
“but for the average British consumer, as long as they have a job, income, stable house prices, and falling interest rates”
There are a few “if”s there. We shall see…