Chief Economist’s Weekly Brief – Heading towards the exit

Economic data will be closely scrutinised for evidence of the impact of the UK’s referendum result to leave the European Union. But in the immediate aftermath of the vote the political changes were already occurring. 

Out. On the 23rd of June the UK voted to leave the European Union by a margin of 52% to 48%. Turnout was 72%, meaning that over 30 million votes were cast. The following morning the Prime Minister, David Cameron, announced that he would be stepping down in the next few months and that it would be the responsibility of his successor to invoke article 50, the procedure in the Lisbon treaty that governs exit from the union. The significance of invoking article 50 and formally notifying the EU of the UK’s intentions to leave is that it fires the starting gun on a two year timetable for negotiations.

Follow the money. Last week financial markets got ahead of themselves with sterling and equities rallying ahead of the referendum result. Incoming polls and more significantly the bookies pointed to Remain. Friday’s result triggered a sharp about turn. Sterling suffered a record one-day loss against the dollar plunging over 8% on Friday, almost double the decline on Black Wednesday in 1992 when the UK exited the Exchange Rate Mechanism (ERM).  Today a further 2% fall has occurred with sterling at its lowest level against the dollar since 1985 ($1.335).

UK not alone. A flight to safety has seen the price of gold and other safe-haven assets such as government bonds rally. The yield on a 10-year gilt has fallen below 1% for the first time. Meanwhile equities have slumped. Over $2 trillion was wiped off global equity markets on Friday a bigger one-day loss than occurred following the collapse of Lehman Brothers. The FTSE 100 initially fell by almost 9% before closing on Friday down over 3%. The real impact was evident on the next tier of UK companies with the FTSE 250 (top 250 companies) falling over 7%, the largest daily decline since 1987.  The FTSE 100 and FTSE 250 are down a further 1% and 3.5% this morning. But UK equities are still faring better than their European equivalents.  The Euro Stoxx index fell by almost 9% with banking stocks falling by over twice this figure.

What we make. UK manufacturers sold an average of £1bn of goods a day last year, but whilst that total hasn’t budged since 2014 there have been big movements in what we’re making and selling. Transport is a particular success story. Manufacturing of vehicles and other transport equipment grew by 4% last year and is now 60% above its 2009 level. We’re pretty good at making tasty stuff too. Sales of food and drink are 18% higher than they were in 2009, helped strong growth in whisky and a doubling of gin output. At the other end of the table sales of chemicals fell. It seems distilling beats refining these days.

People power. The UK population rose by over 0.5m pass 65 million in the year to mid-2015. That’s an annual rise of 0.8%, making the current period of population growth the strongest in a century.  A number of London boroughs are witnessing population growth unseen since the Industrial Revolution: 8.5%y/y in ‘The City’ , 4% in Tower Hamlets and Westminster. And like the Industrial revolution, the lure of cities continues. The biggest independent growers (those not overly influenced by London), tend to be cities, key ones being Exeter, Coventry, Corby,  Manchester and Cambridge. In contrast the small-ish number of Local Authorities seeing a fall in population tend to be rural areas far away from the metropolis.

Pause. In testimony to Congress last week Janet Yellen reiterated her view that the US economy has continued to make progress towards full employment and 2% inflation in the first half of this year. That’s despite recent disappointing numbers for jobs and investment. They contributed to the Fed pausing on a rate rise this month. Another factor staying their hand was the UK’s referendum. Our decision to leave is likely to mean the Fed will wait longer-still before hiking again as it assesses the impact on the world and US economies.

French strikers. No, not Giroux and Griezmann but the flash results of the euro zone PMI. They suggest the pace of growth slowed a little in June, the main gauge falling from 53.1 to 52.8. If you’re looking for a culprit, blame the wave of strikes in France. The PMI there dipped into contraction territory and pulled the bloc’s score down with it. Overall, services growth slowed to its weakest pace in 18 months while manufacturing accelerated modetly. None of this will give the European Central Bank any reason to relent on its stimulus measures.

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