Can UK’s post-Brexit strong performance continue?
Britons beat doomsayers with positive economic data after the vote, thanks to consumer confidence and falling pound
The British economy has performed far better than expected following the country’s vote to leave the European Union, thanks to consumer confidence, a falling pound and immediate policy action. Yet in the face of continued uncertainty about what Brexit might mean, it remains unclear how sustainable this performance will be, with implications for the rest of the world, not to mention Hong Kong.
In August, the Bank of England’s Monetary Policy Committee predicted the British economy would grow 0.8 per cent in 2017. On Thursday, it upgraded that forecast to 1.4 per cent, saying “indicators regarding the near-term outlook for growth had been stronger than expected”.
It would have been hard for the central bank not to modify its forecast. Just before the announcement, Britain’s services purchasing managers’ index came in at 54.5 per cent, two points above consensus expectations and the previous month’s reading, following a third quarter in which an HSBC report described the sector as “being in rude health”.
The services sector accounts for about 80 per cent of the British economy.
“The British economy has not evolved as expected after the referendum on EU membership. What did the Monetary Policy Committee get wrong?” asked a Standard Chartered report published after the Bank of England’s announcement.
When Britain voted to leave the EU in June, most analysts predicted its economy would suffer. Ratings agencies Fitch and Standard & Poor’s downgraded the country after the vote while Moody’s Investors Service gave its rating a negative outlook.
Standard Chartered itself had predicted growth of just 0.5 per cent for 2017, though it has since raised its forecast to 1.2 per cent.
Despite these predictions, recent economic indications have been mostly positive. The country grew 2.3 per cent year on year in the third quarter and has continued to post strong data, enabling a number of pro-leave commentators to declare that “Brexit doom-mongerers have been proved wrong”.
At present, Britain remains a member of the EU and will do so until two years after it officially notifies the European Commission that it intends to leave under Article 50 of the Lisbon Treaty.
Before the referendum, there were concerns about how markets would react to a vote to leave and their ramifications for the real economy. Since the vote on June 23, the pound has fallen 16 per cent against the US dollar, though this so far has had little effect on consumer and business sentiment.
“There is little evidence of Brexit-related uncertainty damaging spending ... Households are enjoying a buoyant job market and easy credit availability,” said the Standard Chartered report.
Businesses also reported stronger activity in the three months to October, with the growth indicator from the Confederation of British Industry rising to eight from a six-month low of three in September.
Furthermore, the weak pound has made British goods and services appear cheaper to international buyers.
“We see a lot of positives for Britain for the next 18 months,” Jerome Broustra, AXA Investment Managers’ head of global rates, fixed income, told the South China Morning Post.
“The pound is likely to be much lower than it was, but British companies will still enjoy tariff-free access to EU markets.”
Despite this near-term optimism, longer-term prognoses are less reassuring. While upgrading its growth forecast for 2017 in the statement, the Bank of England also warned of increasing dangers from inflation, a result in part of the weak pound.
The question of Britain’s eventual relationship with the EU also remains uncertain.
In a report last week, Moody’s wrote: “The scale of the impact of Brexit on [the country’s] growth prospects will depend on the format of Britain’s new trading relationship with the EU.”
There is no shortage of pieces of analysis attempting to predict what will happen next to Britain.
“Personally I think it’s too soon to tell what the situation for financial services in [Britain] will be after Brexit. However, there seems to be a lot of posturing going on and you have people coming up with numbers to support particular objectives,” PwC’s global financial services tax leader William Taggart told the Post.
An HSBC report published after the Bank of England’s announcement took a different tack.
“One of the things today’s large forecast changes point to is the perilous nature of forecasting in such an uncertain environment,” it said. “With elections in the US coming up on Tuesday, it’s by no means impossible the environment will become even less certain.”
Hong Kong is one of the Asian economies most exposed to Britain. And with its dollar pegged to the greenback, not to mention the uncertainty over a hard landing in mainland China, forecasting anything about the city’s prospect looks like a tough call, according to HSBC.