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Why it's the consumer who'll feel the real pain of Brexit

Economy Watch

By Neil Gibson, director of the Ulster University economic policy centre

The Brexit vote is now a month into the rear view mirror and, contrary to some forecasts, the world is still turning, businesses are still selling and consumers are still spending.

It is too early to say what the full impact is going to be, not least because of the uncertainties over trade and migration policies, but the short term catastrophe many people feared has certainly not materialised.

The performance of the stock market has surprised many people and the currency market has stabilised somewhat after initial falls. The Bank of England held fire on an interest rate moves, unsure yet what the actual impact on firms and consumers will be.

New forecasts are starting to emerge, IMF projects 1.3% growth in GDP for the UK in 2017, PwC is suggesting 0.6% and EY Item club 0.4%. At the local level PwC's economic growth forecast is for 1.0% this year followed by 0.2% for Northern Ireland in 2017.

Clearly substantial downgrades across the board - though notably not a deep recession. The IMF had said pre-vote that a recession was a 'probability' but that is not the central forecast in its latest report. Is there the possibility the outcome might not be as bad as we were led to believe?

Little can be made of stock market and currency movements in the short run. They are likely to fluctuate significantly over the months ahead as news filters out about trade deals, border controls or major investment decisions by firms. It is certainly the case that much of what made Britain and Northern Ireland a good place to do business remains in place. The drivers of productivity such as skills, R&D, innovation are just as critical as they were before the vote and they will not have changed overnight. Businesses will still try to make money and, if required, look for new trade route and opportunities, a fact ignored in almost all the pre-vote forecasting of impact. So where should we look to determine how the short term outlook might be affected?

Conventional wisdom suggests looking at investment numbers, with forecasts suggesting UK firms will put investment on hold and this will trigger an economy wide slow down. UK investment was hardly stellar before the vote, in fact a significant body of literature is developing suggesting firms have spent far too much time and money on pleasing shareholders, increasing dividends and paying handsome senior executive salaries. So if there is a fall it is not from a very high level. There are even reasons to suggest investment might exceed expectations as there is a need to replace plant and equipment and to carry out repairs and maintenance that may be hard to defer much longer given the low levels of post-crash investment.

The other major category of investment is house building and it is likely that if overall investment levels fall in the economy then housebuilding will have fallen sharply. This is perhaps a bigger worry as it suggests a contraction on the consumer side. It is here I would argue that we need to focus our attention to see just how the economy is going to shape up over the next 12/24 months.

The UK remains heavily dependent on consumer spending, to an arguably unhealthy degree.

The table above shows how much a 1% fall in each component of GDP would make to overall UK prospects (assuming no interlinkages). It is consumer behaviour that is critical for short term prospects, indeed John Lewis's weekly sales figures were enough to move the market when they showed a post Brexit fall, even though the pattern looks remarkably similar to the two years previous.

It is to car sales, retail sales and in particular mortgages issued and house sales that I am focusing my attention in trying to gauge the short term impacts. There is too little data to make a call at this point and I am therefore grateful our new forecasts are not due until the autumn.

Assessing longer term impacts is a different matter altogether. Attention shifts to migration policy and trade deals to determine what the economic outturn will be. It is worth remembering that although the UK economy had been growing pre-Brexit, GDP per head had not been improving as strongly.

Or to put it glibly, we have more money as a society but as there are a lot more of us, we don't individually have more money. All was not rosy pre-Brexit. As UUEPC forecasts kept pointing out, the UK is too consumer dependent, has a week trade position and a Government committed to more austerity. We may see a slow down or even an end to austerity if recent Government announcements are followed through in the budget and we have a much weaker currency, something many economies around the world are desperately trying to engineer.

Therefore, on the face of it, many of the macro-economic shifts brought on by Brexit may be rather desirable.

This is not to downplay the risks. Within my own sector the Brexit impacts are already being felt acutely with many collaborative research bids across Europe no longer looking favourably on UK partners.

As we come to terms with the post-Brexit world, it is not the scorched earth some predicted and a lack of data prevents any clear assessment of the likely impacts, short or long term.

Thinking about forecasts for the 12/24 months ahead, it should be consumer behaviour we observe to understand the economic impact and I continue to place a UK housing crash (which would not be as acute locally given our relative prices) as my number one economic risk.

In next week's Economy Watch, we hear from Danske Bank chief economist Angela McGowan

Belfast Telegraph