segunda-feira, 12 de setembro de 2016
Why Brexit hasn’t destroyed the British economy (yet)
Why Brexit hasn’t destroyed the British economy (yet)
Since the referendum, UK consumers and businesses have defied the doomsayers. But the day of reckoning has only been delayed.
9/11/16, 6:00 PM CET
LONDON — It was supposed to be a summer of discontent.
But after the Brexit vote, many Britons feel they have never had it so good.
In the early hours of Friday, June 24, as Britain’s shocking decision to leave the EU dawned on the world, economists of all stripes took out their red pens, slashing forecasts and predicting short-term woes and long-term pain. Their consensus view, shared by many experts, including POLITICO, was that one of Europe’s strongest economies would sputter in 2016 and grind to a halt next year.
Credit Suisse headlined a post-referendum research report “Mayday! Mayday!” while Morgan Stanley’s economists spoke of a step “into the unknown.” All of a sudden, the warning of a “DIY recession” from then-finance-minister George Osborne in the run-up to the voting appeared close to becoming a reality.
A new moniker was coined: “Brecession.”
Less than three months later, the doomsayers are beating an embarrassing retreat.
Financial analysts and economists are now busy revising their predictions upwards and scrapping calls of a 2017 recession, defined as two consecutive quarters of negative growth. After being wrong-footed by the referendum result, the City of London and assorted pundits have been fooled by its economic aftermath.
Far from being hampered by the uncertainty surrounding the vote, the British economy accelerated in the three months through June, driven by strong consumer spending, a big improvement in industrial production, and business investment. And the picture has remained positive, albeit not as rosy, since then, with preliminary data showing manufacturing and services holding up well, and retail sales stronger than expected.
What went right?
Brexit supporters are already taking victory laps. “I see no circumstances where the Brexit vote can cause a recession in the U.K.,” John Redwood, a leading Conservative Euroskeptic, told POLITICO’s Tom McTague.
What went right for the U.K economy after the vote? And can Britain really survive a historic break-up from its biggest trading partner with just a few scrapes? The answers are, respectively: “A lot” and “not really — in the long-term.”
Political developments, for once, also helped. Instead of descending into months of internecine strife, the ruling Conservative party was able to swiftly appoint Theresa May.
First, the good news. The British economy didn’t fall off a cliff after June 23, thanks to a benign confluence of previous momentum, a swift political entente and radical action by the Bank of England.
In 2015, the U.K. was one of the best-performing economies in the developed world, notching up a 2.3 percent growth rate, a smidgen below that of the U.S. (2.4 percent) but way ahead of the 1.6 percent recorded by the eurozone, according to the Dutch bank ING. Employment soared to levels not seen in more than a decade, while low-interest rates and even lower inflation kept the housing market humming and consumers shopping.
Economists say that when an economy is growing like that, it’s difficult to knock it off its tracks, partly because a lot of investment and spending decisions are locked in for the long term. Companies, for example, prefer to reduce margins, dip into reserves, or hike prices before cutting their workforce or reversing investment decisions. And individuals loathe changing their spending patterns unless there’s a life-changing event — like layoffs.
Political developments, for once, also helped. Instead of descending into months of internecine strife, the ruling Conservative party was able to swiftly dispose of the referendum-losing Prime Minister David Cameron and appoint Theresa May as his replacement in a matter of days. May, a Remainer before the vote, formed a Cabinet that seemed to balance the views of the Out camp — three key Brexiters were given big jobs — with the pragmatism needed to get a deal out of the EU.
What economists appeared to have gotten wrong is the timing of a Brexit-induced slowdown.
“Many were expecting the Tories to really implode. That didn’t happen,” said Jean-Michel Six, chief economist for Europe, Middle East, and Africa for Standard & Poor’s. “The conservatives demonstrated an amazing ability to move to the next step, forget about Cameron and appoint a new PM that impressed markets and public opinion. That was very reassuring.”
The Bank of England compounded the feel-good factor in August by throwing “the kitchen sink” at the economy, as Robert Wood at Bank of America Merrill Lynch put it. Among other things, the BoE’s move made the sterling weaker, helping British exporters and boosting inward tourism.
The first BoE interest rate cut since 2009, coupled with other stimulus measures, also sent a powerful message to markets, companies, and consumers alike: That the country’s monetary authorities will not be standing idly and let Brexit wreck the economy.
Tougher times lie ahead.
For a start, not all indicators continue to point upwards. On the consumer front, high-street sales have suffered after a strong July, falling 1.5 percent in August compared to a year ago, according to accountants BDO. And on the business side, an industrial trends survey from the Confederation of British Industry in July showed that optimism about the business situation over the previous quarter had fallen at the fastest pace since January 2009. The CBI also found that companies’ desire to invest in buildings and factories had fallen sharply.
As doubts grow over Britain's relationship with the EU, many expect the foreign money to stay away, making it less possible for Britain to "rely on the kindness of strangers," as Mark Carney, the governor of BoE, has said, citing American playwright Tennessee Williams
As doubts grow over Britain’s relationship with the EU, many expect the foreign money to stay away, making it less possible for Britain to “rely on the kindness of strangers,” as Mark Carney, the governor of BoE, has said, citing American playwright Tennessee Williams | Justin Tallis/AFP via Getty Images
What economists appeared to have gotten wrong is the timing of a Brexit-induced slowdown. Instead of fretting about investments and tightening belts immediately after the vote, the Britons had a leisurely summer in the (relatively) good weather, enjoyed the country’s Olympics successes and took advantage of the benign political and monetary situation to carry on spending.
But that has only delayed the day of economic reckoning. A tidal wave of uncertainty is about to hit Britain’s political and economic landscape as the country embarks on treacherous talks over its future relationship with the EU.
“We think the key risk event is the point at which Article 50 is triggered, i.e., the formal notification of the U.K.’s intention to Leave the EU, which we currently expect in the first quarter of 2017,” wrote Morgan Stanley economists Melanie Baker and Jacob Nell in a recent note.
As for consumers, the most important determinant of their spending is whether they have a job or not. As a result, consumer spending tends to lag, rather than lead, any economic contraction. In the view of Kathrin Muehlbronner, lead U.K. analyst at Moody’s Investors Service, British consumers will start to feel the pain of a Brexit downturn only when the job market weakens, something that might not happen until next year.
Less acute but more chronic pain
Indeed, some economists, like ING’s James Knightley still forecast a Brecession in 2017. A delayed timetable doesn’t mean the pain will be any less pronounced. “The drag on growth looks less acute than we had expected but may be more chronic,” Bank of America’s Wood wrote to clients.
Much will depend on how foreigners behave. Not, mind you, the foreign workers that hard-line Brexiters want to keep out, but overseas investors such as the Japanese car companies or Chinese real estate buyers that have been funding Britain’s gaping current account deficit. As doubts grow over Britain’s relationship with the EU, many expect the foreign money to stay away, making it less possible for Britain to “rely on the kindness of strangers,” as Mark Carney, the governor of BoE, has said, citing American playwright Tennessee Williams.
To be clear, U.K. policymakers can, and will, try to counter these negative effects. New Chancellor of the Exchequer Philip Hammond is due to unveil his first fiscal measures on November 23 and is certain to reverse the austerity of Osborne and add tax cuts and spending plans to stimulate the economy. And the BoE could cut rates further and add to its bond purchases, going down the stimulative path blazed by the U.S. Federal Reserve, Bank of Japan and European Central Bank.
But those actions may not be enough to stop a once-booming economy from hitting the wall — or at least braking very hard before it.
Even May has admitted that “there may be some difficult times ahead.” By next year, that could be seen as a stunning example of British understatement.
Silvia Sciorilli Borrelli contributed reporting.