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UK economy stays resilient despite shock of EU exit

by International Commercial Investment on August 28, 2016

Source: The Telegraph

The UK economy is bouncing back after the Brexit vote, a string of surveys will show this week, in further evidence that optimism is returning after the initial shock of the result.

Surveys of manufacturing and construction output for August are expected to show a partial recovery in activity following July’s massive drop, reducing the chance that the UK will fall into recession at the turn of the year.

A closely watched barometer of consumer confidence is also expected to show sentiment is on the rise following the biggest drop in optimism since 1990 in July, according to economists.

A record deterioration in the Markit/IHS purchasing managers’ indices between June and July helped to seal the Bank of England’s decision to cut interest rates to a fresh low of 0.25pc and unveil a £170bn stimulus package designed to prevent a deep downturn.

However, early indicators, including official retail sales data and a partial snapshot of the jobs market, suggest the UK economy remains resilient.

Economists expect Markit’s gauge of manufacturing activity to rise to 49 in August, after dropping to a three-year low of 48.2 in July.

While still below the 50 level that signals growth, economists said the data pointed to a slowdown rather than a collapse in activity.

Several analysts expect the manufacturing sector to eke out growth in August, as exporters benefit from a weaker pound.

Alan Clarke, an economist at Scotiabank, said: “Many businesses are realising that the pessimism has been overdone and the vote to leave the EU hasn’t caused the sky to fall in.”

GfK’s latest consumer confidence survey is also expected to rise, following July’s dramatic fall – the biggest in 26 years.

Despite the drop, July’s survey suggested Britons were not yet squirrelling away their cash in anticipation of a downturn.

The steady recovery is in contrast to warnings by the Treasury that voting to leave the EU would plunge the UK into a year-long recession.

Analysts at Oxford Economics said the recent run of indicators, including surveys by the Confederation of British Industry (CBI) that show sales in retail and manufacturing remain robust, “suggest that the economy has remained resilient to post-referendum uncertainty”.

Andrew Goodwin, lead economist at Oxford Economics, said: “Should this pattern be mirrored in this week’s high profile GfK and PMI surveys, our forecast of zero growth for the third quarter may start to look too low.”

Most economists still expect growth to slow markedly in the coming months. Brian Hilliard, chief UK economist at Societe Generale, warned that the bigger concern for policymakers was a prolonged period of slow growth, as he described the Bank of England’s forecast of 1.8pc in 2018 as too optimistic.

He said: “Recent surveys from the CBI and the Lloyds Business barometer point to quite a strong bounce in the PMI [but] this is really the first round only.

“What I think we are going to see is a succession of shocks which will keep growth very, very weak.”

Economists are even more worried about the construction industry, with Markit’s July poll showing a steep downturn led by commercial property.

Markus Stadlmann, chief investment officer at Lloyds Private Banking, said that while he remained optimistic about the UK’s economic prospects, Lloyds had slashed its commercial property investments.

“If you exclude rental income, we don’t expect any additional price return for the next couple of years – and that was even before the referendum. Now it’s even more challenging.

“Why would international investors return readily? There might be bargain hunters off the back of the weaker currency, but that’s not what the market lives on.

“It needs continuous, broad-based investment, and I don’t think foreign institutional investors have an easy time justifying real estate investment in the UK at the moment,” he said.

International Commercial InvestmentUK economy stays resilient despite shock of EU exit