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Factory rebound may be false dawn as we haven’t left EU yet

By Angela McGowan, Danske Bank chief economist

Published 06/09/2016

Brexit’s impact will rely on deal UK gets
Brexit’s impact will rely on deal UK gets

Over two months have passed since the UK’s referendum on EU membership and life is carrying on regardless. The impact of this decision is already apparent to some businesses and some households, but there are many others who have seen no difference in their circumstances whatsoever.

But there are a few very obvious changes which have occurred due to the outcome on June 23, which you cannot have failed to miss. These include currency depreciation, interest rate changes and the significant change to the UK’s political landscape.

Then of course there are also much more subtle changes that households do not see. These include things such as rising input prices for manufacturers and delayed, or possibly reneged, investment decisions.

For example, a survey was published by the Association of Graduate Recruiters last week which showed that Britain’s large employers have scaled back their graduate recruitment plans by 8% this year relative to last. When uncertainty is high, caution is definitely the name of the game.

The UK’s GDP data, which will capture the post-referendum period, is not available until September 30. However, in the interim some unofficial data is available from surveys of business activity, employment and also investment intentions — all of which generally saw contractions in July. That said, we must remember that economic activity during July will have reflected the fact that the UK was also undergoing a political crisis at that time.

Perhaps Theresa May’s new government will have lent some degree of confidence to the situation. Strong leadership is key when there is uncertainty.

So, while many businesses surveyed suffered in July, there is a fair chance that the August data may show stabilisation.

After all, we have not actually left the EU yet. Indeed, one important survey has already bounced back — the UK’s manufacturing PMI survey, which showed that manufacturing (which accounts for 10% of the UK economy) has seen improving domestic and export orders.

But let’s not get carried away, as one Conservative member of the Commons Treasury committee, Jacob Rees-Mogg, did.

Having seized upon this good manufacturing data last week, Mr Rees-Mogg went on to claim the Treasury and the Bank of England had been proved wrong in their warnings about Brexit — he claimed the PMI data demonstrated that these institutions had been “scaremongering” before the referendum.

Unfortunately, he and a few myopic Euro-sceptics are unable to see one fundamental fact — Brexit has not actually yet happened.

Currently, we are only dealing with the consequences of a vote, not the actual event. We are still in the European Union and Mr Rees-Mogg appears to be entirely ignoring the fact that UK manufacturing is temporarily getting a boost because it is getting the best of both worlds.

UK manufacturers are still EU members with full access to the single market while simultaneously they have gained competitiveness from the weaker currency.

The reality is that at this stage no one really knows what the actual outcome of Brexit will be.

Right now we are only seeing the ripples of a mere “decision” to exit, so we should not read too much into that. The true impact of a Brexit will depend upon the deal that the UK manages to negotiate. Brexiteers want access to the Single Market, they want influence over the rules and regulations for selling into that market, they want control over migration and an independent trade policy. In addition, they don’t want to pay any money into Europe.

Forecasting the economic outlook has never been so tough, because the future is so unclear. But in the meantime, we can be sure of a number of things. Not everything the Brexiteers want will be achievable. Complex trade-offs will be needed.

We also know that until the Government defines what Brexit looks like and engages in positive negotiations with Europe, the pound will stay weak. A weak pound pushes up inflation for firms and consumers in the medium term, investment will continue to slow in the UK until the uncertainty is resolved and, finally, we know that low investment levels are bad for the labour market.

But there are also some positive things that we can be certain of.

Policy makers have tools which they can employ when low growth and low investment are on the horizon. Early action by the Bank of England to lower interest rates, buy corporate bonds and ensure funding is available across the economy will work to ease conditions when times get tough.

Admittedly, these moves have consequences for other parts of the economy such as savers, the banking sector and asset prices.

But this action also sends out an important early signal (that credit will not be a problem in the years ahead) and also demonstrates that the Brexit shock to the economy is very different from the 2007/2008 financial crisis.

In addition, the Chancellor of the Exchequer, Philip Hammond, has also signalled that he will adapt fiscal policy (taxes and government spending) if needed.

And, closer to home, we are seeing much needed signals that the Northern Ireland economy and our political stability will not be jeopardised during Brexit negotiations.

The Brexit Minister David Davis made Northern Ireland his first port of call last week when gathering information from the business community on how Brexit would impact the UK regions.

He was adamant that both the UK and the Republic of Ireland “both want to have an open border”. This issue, along with access to EU markets, will be critical to Northern Ireland’s future economic success.

Today marks Angela’s final Economy Watch before she takes on a new role as regional director of the CBI. Next week, we hear from PwC NI chief economist Esmond Birnie

Belfast Telegraph

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