The UK economy: A surprisingly strong summer
In the immediate aftermath of the European Union referendum, a number of political and market commentators were forecasting doom and gloom ahead for the UK economy and investors braced themselves for a rocky few months.
However, UK economic data over the summer months has been surprisingly robust. The purchasing managers’ indices for both services and manufacturing jumped to 52.9 and 53.3 respectively in August, well above market expectations. Industrial production in July increased by 2.1% (year on year), also beating expectations.
The chart shows the Citi economic surprise index for the UK, which looks at whether UK economic data is coming in above or below market expectations. The chart shows how impressively the UK economy has defied economist projections over the last couple of months.
Challenging times ahead
Does the recent bounce in economic data mean that the UK economy is out of the woods? The answer is probably not. It will take some time for the full effect of the Brexit vote to be reflected in economic data. Looking at Bank of England (BoE) forecasts provides some insight into what might lie ahead for the UK. The BoE expects business investment to begin to contract in the coming months as firms look to scale back their UK operations gradually over the course of this year.
These expected cutbacks in investment would begin to hurt the consumer in 2017 and 2018 as workers are laid off and unemployment begins to creep back up. As consumers make up 60% of UK GDP, it is likely that it won’t be until 2017 and 2018 that the threat of a pronounced economic slowdown begins to really creep in.
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