GDP

Brexit has cost the UK economy £600 million a week since the referendum, and the shock of a no-deal divorce could hammer the country even harder.

A new report published by investment banking giant Goldman Sachs suggests that, since the June 2016 vote, nearly 2.5 per cent has been shaved off GDP.

It argues that, had UK voters opted to remain, the economy would have been in a much stronger position, instead of underperforming and lagging behind other advanced economies.

Goldman’s number crunchers concluded that investment has been one of the biggest casualties of the Brexit debacle, confirming official data which has shown it in decline.

“The component-level breakdown reveals that output losses have been concentrated in investment and private consumption,” they said.

“The outsized impact on investment suggests that political uncertainty associated with the Brexit process may, indeed, be one of the major sources of the economic cost of Brexit.”

The report echoes Bank of England analysis that suggested around £40 billion per year, or £800m a week, of lost income for the country as a whole since the result of the leave vote.

Goldman added that under a no-deal scenario, favoured by the most extreme Tory Brexiters, the UK will be a big loser, but its European neighbours would also suffer.

It said: “Under our ‘no-deal’ scenario, the UK suffers large output losses, in conjunction with a substantial global confidence shock marked by a sharp sterling depreciation. European countries would be most exposed to this scenario and could see output losses of around 1 per cent of real GDP.”

Conversely, a “status quo” Brexit transition deal would reverse part of the UK’s output underperformance and, under a remain scenario, the UK “fully recoups Brexit-related output costs and business confidence rebounds”.

Separate figures yesterday showed Brexit stockpiling helped fuel a surge in manufacturing output last month as firms sought to avoid being caught short ahead of what was supposed to be Britain’s departure from the EU.

The Markit/CIPS UK manufacturing purchasing managers’ index showed a reading of 55.1 last month compared with the 52.1 recorded in February. It represents a 13-month high and beat expectations from economists, who forecast a reading of 51.2. A figure above 50 indicates growth.

Rob Dobson, director at IHS Markit, which compiles the survey, said: “Output, employment and new orders all rose as manufacturers and clients raced to build safety stocks. Stocking of finished goods and input inventories surged to new survey-record highs.”

Source: Scotsman

– UK economy rebounds with a bang in January as GDP rises 0.5%.

– Rebound more than offsets -0.4% decline seen back in December.

– And may be enough for markets to keep faith with BoE rate hike bets.

The UK economy rebounded from its December slump early in the New Year, according to Office for National Statistics (ONS) figures released Tuesday, and momentum behind the recovery could be enough to ensure financial markets keep faith with hawkish bets about Bank of England (BoE) interest rate policy.

The UK economy grew by 0.5% in January, which more than reverses the -0.4% decline seen back in December, when markets had been looking for only a 0.2% increase in the New Year.

All main sectors of the economy contributed to growth during the January month, with the exception of agriculture, although the standout performer was the construction sector which saw output rise by 2.8%. However, that simply reverses a -2.8% decline from December.

“The larger than expected monthly increase in GDP of 0.5% in January (consensus 0.2%) is a reassuring sign that, up until January at least, the UK economy was weathering the political crisis at home and slowdown overseas pretty well,” says Andrew Wishart, an economist at Capital Economics.

“The rebound in GDP in January, after December’s 0.4% month-to-month drop, is a timely reminder that the PMIs aren’t a reliable indicator of the economy’s momentum when political uncertainty is elevated,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Tuesday’s report comes after IHS Markit PMI surveys of the services, construction and manufacturing sectors suggested strongly that the economy ground to a halt in January.

Those PMI surveys continued to point toward economic stagnation after ONS data revealed the December GDP contraction, leading to increased speculation that the economy had hit a rough patch just as the March 29, 2019 Brexit day appeared on the horizon.

ONS figures for January show the economy rebounding resolvedly from its December trough but the UK economic picture painted by Tuesday’s numbers is entirely different when viewed over a longer horizon, because GDP grew by just 0.2% for the three months to the end of January.

Above: Sectoral contributions to UK GDP growth on a three-month basis.

Quarterly growth was led by a robust expansion in the services sector but the increase was unchanged from the 0.2% pace of growth seen in the final quarter of 2018 and takes the shine off of Tuesday’s headline.

On a three-month basis the services sector expanded by 0.38% while output from the construction sector declined -0.04% and output from the industrial sector fell -0.12%. However, economists say the pace of growth in the January month alone could be more important for the outlook than the three-month number.

“January’s increase in GDP exceeded even our top-of-the-range 0.4% forecast, so we are revising up our forecast for quarter-on-quarter growth in Q1 to 0.3%, from 0.2%. This implies that little, if any, excess capacity will open up in the first half of the year, giving the MPC little time to delay another rate hike if, as we expect, GDP growth regains some momentum once a Brexit deal has been signed off,” says Tombs.

Tuesday’s data follows a year in which UK GDP grew by just 1.4% after the economy expanded by 0.2% in the final quarter, 0.6% in the third quarter, 0.4% in the second quarter and just 0.1% in the first quarter. That was the weakest expansion since 2012, and one that many economists have attributed to uncertainty over the Brexit process.

First quarter GDP growth has tended to be weak in recent years and given the performance of the economy in 2018, expectations for the New Year period in 2019 have been particularly downbeat. But some economists are telling their clients that Tuesday’s figures could mean this year is different.

“There is no denying that today’s figures suggest the economy is weathering the Brexit storm remarkably well,” says Wishart of Capital Economics. “Of course, the data may deteriorate in February and March if Brexit has caused consumers and firms to reach for the handbrake. But note that even if monthly GDP growth is zero in February and March, the economy would still grow by 0.4% in Q1. As a result, we are happy to stick with our 0.3% q/q forecast.”

Above: UK GDP growth trends.

Currency markets care about the GDP data because of what it might mean for Bank of England interest rate policy. Rising demand within an economy can often mean increased inflation pressures, and it is changes in the consumer price outlook that dictate BoE interest rate decisions.

The BoE has raised rates by 25 basis points on two occasions since the referendum in 2016, taking the Bank Rate up to 0.75%, and it’s said repeatedly in recent months that elevated inflation and a robust outlook for consumer price pressures mean it’ll need to keep raising rates in the coming quarters.

However, pricing in the overnight-index-swap market implies a BoE bank rate of just 0.81% for December 19, 2019, which is just 6 basis points above the current cash rate and suggests strongly that investors have only limited appetite for betting on a BoE rate hike coming this year.

The actual Bank Rate that would prevail if the BoE were to hike again is 1%. As a result, there is significant scope for investors to price-in BoE policy action for 2019, which would be positive for Pound Sterling exchange rates if such a thing were to happen.

Many economists say a deal facilitating an orderly exit of the UK from the EU would be enough to persuade the BoE to come off the sidelines and lift its interest rate again.

By James Skinner

Source: Pound Sterling Live

The UK economy grew at its fastest rate in almost two years in the three months to September but business investment fell for the third consecutive quarter.

GDP grew by 0.6 per cent in the third quarter, the Office for National Statistics said today, confirming its initial estimate last month.

But the longer term picture remain “subdued” it said, with business investment dropping 1.1 per cent to £46.9bn.

It is the first time investment has dropped over three consecutive quarters since the economic downturn of 2008 to 2009.

The UK’s current account deficit widened by £6.6bn to £25bn (4.6 per cent of GDP) in the three months to the end of September – the largest deficit since the third quarter of 2016.

The widening was down to increased profits from British companies flowing to foreign investors.

EY Item Club economist Howard Archer said: “The further, marked rise in the current account deficit is disappointing as an elevated shortfall is a potential source of vulnerability for the UK economy – particularly if there was any major loss of investor confidence in the UK for any reason such as Brexit concerns.”

ONS figures also showed that borrowing in November was £7.2bn, the lowest November borrowing for 14 years and £900m less than the same month last year.

GDP growth was led by the services sector, while construction and manufacturing also contributed to the growth.

Household spending also increased 0.5 per cent, the eighth consecutive quarters in which households have spent more than they received.

Head of national accounts at the ONS Rob Kent-Smith said: “Today’s figures confirm the economy picked up in the third quarter with a solid showing from services and construction.

“However, the longer-term picture remains subdued and business investment has now fallen for three consecutive quarters.

“Households continued to spend more than they received, for an unprecedented eight quarters in a row.”

Source: City AM