Economic Update: September 2016

Some good news, but don’t get carried away.

A series of positive economic data in August and early September appeared to defy predictions of immediate Brexit gloom. Nevertheless, a lack of hard data on the state of the UK economy post-EU referendum coupled with forecasts for weak economic growth means caution is very much still in order.

Reasons to be cheerful

After falling sharply in July, the Purchasing Managers Indices (PMIs) for services and manufacturing (which track growth in activity in the sectors) rebounded in August with the largest or joint-largest monthly increases in at least twenty years. One of the main factors behind the bounce was the fall in the value of sterling post-referendum, which benefited exporters.

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The value of retail sales increased by 1.6% in July compared to June and the FTSE100 index was buoyant during August. Surveys indicated a rise in consumer confidence between July and August, although confidence remains down compared to before the EU referendum.

Bank on the ball

These positive indicators may have been helped by economic stimulus announced by the Bank of England at the start of August. The swift formation of a new government in July also helped remove some uncertainty for firms.

The Bank’s Monetary Policy Committee (MPC) cut interest rates to 0.25% (from 0.5%), the lowest rate since the Bank was founded in 1694. A new Term Funding Scheme is intended to ensure banks pass on the interest rate cut to customers. The Bank expanded its quantitative easing programme.

The Bank’s stimulus is intended to mitigate any negative economic effects of the referendum result. The MPC observedthat “the outlook for growth in the short to medium term has weakened markedly” following the leave vote.

Good foundations

The economy was in good shape going into the referendum, as indicated by other data released last month. GDP grew by 0.6% in Q2 2016 compared with the previous quarter (unchanged from last month’s preliminary estimate), up from 0.4% in Q1.

The labour market continued its impressive momentum in Q2: the employment rate grew further into record territory to hit 74.5%, while the unemployment rate dipped to 4.9%. Among the few pieces of evidence relating to the labour market post-referendum was a fall in the claimant count between June and July.

Reasons to be wary

Of course, the primary economic risk associated with Brexit is what happens to trade and investment when the UK actually leaves the EU. The impact will depend on the new trading relationship with the bloc. At present we have little idea what this relationship will look like and the UK has not yet commenced formal negotiations to leave.

Even if last month’s data do give some cause for optimism, the economy could be about to hit a rocky patch. There is much we still do not know, for example what is the impact of the leave vote on investment by firms. A weak pound could soon turn into a hindrance rather than a help, pushing up prices and weighing down real wages. That in turn could depress consumer spending. Indeed, the manufacturing and services PMI releases noted the weakness in sterling had increased firms’ input prices.

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In short, there is still far too little data to come to say how the EU referendum result has affected the UK economy. As new data are released in September and October, the picture should become a bit clearer. Another good reason, dear Reader, to keep up with the Library’s series of Economic Indicators.

This article was originally published in the September edition of the Library’s Economic Indicators paper. The monthly publication provides a snapshot of key economic data covering: growth, labour market, finance, borrowing, trade, exchange rates, business, retail and housing. Individual pages are updated through the month as new data come out.

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