UK: What Happened Over The Summer?

Economic news tends to attract less media coverage and less public interest over the summer. Understandably, journalists, and their audiences, have holidays on their minds. Yet economics is no respecter of seasons and data and events have continued to pile up.

With the summer holidays drawing to an end here's our two-minute take on what happened in July and August.

Summer kicked off with the massive shock of the UK's Brexit vote on 23rd June. Ten weeks on the UK looks in rather better shape than some had feared.

Brexit has not, so far, been a systemic shock. Its economic effects seem localised and there are few signs of contagion from the UK to the rest of the world. The indicators of financial stress which were flashing red in 2008-09 following Lehman's failure, or in 2010-11 at the time of the euro crisis, are at low levels.

Brexit is a political turning point whose long-term implications are unknown. In that respect it has something in common with Labour's election landslide in 1945 or Mrs Thatcher's in 1979. But Brexit is not a global economic shock.

The UK economy went into the vote with pretty decent momentum. GDP growth picked up in the second quarter, driven by strong business investment and consumer spending. The outcome of the vote caused a selloff in UK equities and the pound and led to a sharp fall in growth expectations for 2017.

But recent UK data show some signs of resilience and suggest that the UK has a decent chance of skating around a full-blown recession.

In August the Purchasing Managers survey of manufacturing reported the strongest rise in the index's history following a sharp, post-referendum decline. According to the Confederation of British Industry manufacturing export orders have risen to the highest level in two years on the back of a weak pound.

Retail sales and consumer confidence have rebounded. In an inversion of the usual pattern younger and more affluent voters are the most pessimistic on the outlook for the economy; sentiment among older voters and skilled and unskilled manual workers is much more positive. Shares in UK employment agencies have risen since early July suggesting that investors are not betting on a big downturn in the jobs market.

So what has gone right? The economy has certainly been helped by easier policy. A weaker pound, a rate cut from the Bank of England with more Quantitative Easing to come and the jettisoning of Mr Osborne's targets for cutting public borrowing have all played a part. Financial conditions are fairly benign, with shares in UK-focussed businesses trading well above pre-referendum levels. The fact that global equity markets have bounced since June have helped lift the UK too. 

Yet it is early days and not all the numbers are positive. The UK housing market is continuing to cool and what data we have from the service sector has not been encouraging (the service sector Purchasing Managers index for August, out at 0930 today, will give the clearest picture of the post referendum state of the sector).

The big risk is that caution in the corporate sector will lead to a squeeze on investment, hiring and wages. That could knock the two big engines of domestic growth, consumer and investment spending.

But my hunch is that corporate risk appetite will recover some of the ground it lost after the referendum and that companies will not stop spending. In the wake of the referendum economists slashed their UK growth forecasts for 2017 from 2.2% to 0.7%; my guess is that the slowdown is unlikely to be worse than this and could be a tad less severe.

In Europe, business confidence has fallen over the summer, albeit from high levels. The consumer sector is the bright spot with buoyant retail, car and big-ticket sales in Western Europe.

With euro area inflation running at a feeble 0.2% and GDP growth stuck in second gear the European Central Bank is miles away from raising interest rates. The euro area looks likely to see continued lacklustre growth with money remaining cheap through 2017.

Europe's migrant crisis has eased, but remains acute. Nearly 280,000 migrants and refugees entered Europe by sea in the first eight months of 2016, down 20% from the same period in last year. But deaths at sea have increased and opposition to migration is high in some quarters. In yesterday's regional election in Mecklenburg-Vorpommern Angela Merkel's CDU was pushed into third place by the anti-immigrant AfD party. The vote was a blow to Mrs Merkel and underscores public concerns about her decision, last summer, temporarily to ease controls on migrants coming to Europe. In just over a months' time, on 2nd October, Hungary seems likely to reject a German plan for the relocation of refugees across continental members of the EU.

In the US business confidence, and especially manufacturing activity, has slowed. But, as in the UK and the euro area, the consumer is holding up. US consumer confidence is close to its highest level since the financial crisis. The labour market continues to tighten, earnings are rising and the housing market is seeing good growth.

In the early part of this year there was talk that the US could be heading for recession. Such speculation has evaporated in recent months. It is testament to the improved outlook that the Chair of the Federal Reserve, Janet Yellen, last month said that the case for an increase in US interest rates has strengthened. Financial markets have brought forward expectations for the timing of the next US rate rise and see a near 50% chance that rates will rise by the end of the year.

The outlook for emerging markets has also been brightening somewhat. In a sign of renewed confidence emerging market equities have outperformed Western markets this year. The downward trend for emerging market activity seems to have run its course. Growth is widely expected to accelerate in 2017. India is forecast to grow by 7.6% next year, the fastest rate of growth among any major economy. Brazil and Russia are likely to emerge from recession. Chinese growth is expected to ease, but, at a forecast 6.2% in 2017, would still be far higher than global averages. Crucially, the risk of a Chinese 'hard landing' has eased.

We conclude with some of the latest news on politics in the UK and the US.

Despite initial signs of "buyers' remorse" after the UK referendum, voters' views do not seem to have changed much. A YouGov poll held in the first week of August reported that 46% of respondents believed it was the right decision to leave the EU and 42% thought it was the wrong one. IPSOS MORI reports that immigration remains the number one concern for UK voters, followed by the EU and the NHS. But concern about housing has risen markedly, to the highest level since 1974. In Scotland a YouGov poll held last week showed that 50% of Scots oppose holding a second independence referendum despite the Brexit vote, while 37% want a second vote.

After last Wednesday's special Cabinet on Brexit Prime Minister Theresa May ruled out any form of continued membership of the EU through a 'back door'. She also said leaving the EU would involve new controls on migration from the EU – something which, on current rules, is not compatible with UK membership of the Single Market.

The Brexit minister David Davis has said that the UK will try to negotiate for a bespoke relationship with the EU, instead of going for an "off-the-shelf" solution such as membership of EFTA or the EEA. The government has also indicated that the timing of triggering Article 50 is likely to be pushed back into 2017. There may, indeed, be a temptation to try to delay until autumn 2017. This would avoid tangling Brexit in next year's French and German elections and would give the UK more time to a work out a negotiating position and build the institutional capacity for Brexit.

A YouGov opinion poll held in the last week of August shows that Jeremy Corbyn is likely to remain Labour leader. 62% of Labour Party members support Mr Corbyn with 38% backing Owen Smith.

In the US, the latest batch of opinion polls shows Hillary Clinton on 46% of the national vote and Donald Trump on 42%. But because Mrs Clinton is well ahead in terms of Electoral College votes she is the firm favourite with bookmakers. PaddyPower's latest odds imply a 77% probability of a Clinton victory.

The US Presidential election is likely to be the dominant political focus for markets for the next nine weeks. Brexit is shifting from a shock political event to a prolonged, complex process. Whether the UK economy escapes a hard landing in 2017 will depend on whether corporate spending and hiring hold up.

Our sense is that things are looking up a bit for the US and emerging market economies. Agreed, growth in the euro area is patchy. But, overall, prospects for global growth seem a little better than might have been feared in the immediate aftermath of Britain's Brexit vote.

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