The economy appears to be coping just fine after June’s Brexit vote – but the real test is yet to come
Two months ago today we were waking up to the frankly astonishing news that 52 per cent of the electorate had voted to leave the European Union. The pound had crashed overnight and the FTSE soon followed suit, losing 200 points on fears of a sharp downturn.
In recent weeks we have been treated to a steady trickle of economic indicators (and a bullish FTSE) bringing some clarity to the picture of post-referendum life. Predictably, these have been cherry-picked by both Remain and Leave activists, to suggest that the economy is either descending into ruin, or thriving on a wave of Brexit optimism.
At City PM we endeavour to present the evidence as fairly as possible. Last week’s figures were surprisingly bullish: employment hit another record high in June, while the dole queue actually shortened in the month after the referendum. Brits hit the shops in July, separate data showed, undeterred by the political uncertainty that followed the vote.
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Yesterday’s research from the CBI was also positive, revealing a boost to Britain’s manufacturers in the three months to August, perhaps due to a weaker pound.
Bullish data has seen many City economists revising their GDP predictions for the rest of the year, with some reversing previous forecasts for a technical recession.
However, we are not out of the woods yet. A weaker pound has negative effects, of course, and they will be felt in the coming months and years. Higher inflation will put pressure on household budgets and weigh down on consumer spending, as well as pushing up costs for businesses that import goods or services.
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A slide in business investment is widely expected by economists due to uncertainty surrounding the country’s post-Brexit prospects; the decline is yet to be confirmed by solid data, but as a serious threat, it cannot be dismissed. Lower investment would worsen our productivity puzzle, and restrict both wage growth and job creation.
Recent data has been reassuring, and dispelled the fears of an immediate post-referendum crash. Nonetheless, the real tests have yet to come. The UK’s fate lies not in the summer’s string of economic data releases; rather, it depends on how cleanly the country can exit the EU and transition to an open, liberal, low-tax, and free-trade economy that encourages its key industries and emerging enterprises.