Last week the International Monetary Fund (IMF) cut its Post Brexit UK growth forecast for next year by 0.9%. The Pro Brexit press, namely the Express and the Telegraph claimed that the remaining 1.3% growth and the fact that this year’s growth is only expected to drop by 0.2% was a strong indicator that Brexit wasn’t going to hit the UK economy that hard.
There are three major flaws in this analysis, firstly the 1.3% growth is actually a fall of around 41% on the pre-Brexit forecast. Secondly an actual Brexit is not going to happen till two years from the point that the UK Government enacts Article 50, making the probable Brexit date December 2019 and so any major fall out will be closer to that date. Right now the UK still is an EU member and has unfettered access to the single market. As a result of point two any market turmoil now is likely to be far worse as we near the Brexit-point, so bad news now is likely to get far worse within a couple of years and last week we received very bad news on the economic front.
Thirdly on Friday IHS Markit and the Chartered Institute of Procurement and Supply issued a flash estimate following a survey of purchasing managers, known as the PMI survey, and its bad news for the UK economy but actually good news for the rest of the EU. The PMI ranks the health of sectors in a score of 0-100 and any score of less than 50 means the economy is expected to decline and a score of over 50 would indicate growth.
Scores on the doors:
• Eurozone Services PMI 52.7, down from 52.8 in June, (but beats 52.5 forecast).
• Eurozone manufacturing PMI 51.9 and near the 52 forecast.
In particular Germany and France are doing better than expected with France’s Composite PMI at 50.3, a turnaround for the nation that last month overtook the UK as the world’s 5th largest economy and Germany’s Composite is a massive 55.3 against an estimate of 53.7.
So what does this mean? Well the UK economy is now forecast to enter negative growth next quarter and if that happens twice in a row we are in recession before Article 50 has even been enacted. What’s worse is that the construction sector was not covered in this survey and it is possibly more open to cancelation / postponement of capital projects than any other sector, and so UK figures might be considerably worse than suggested by the survey. Manufacturing in the UK has also not taken as big a hit as services but exports will have been boosted by the fall in the pound making UK manufactured goods more affordable – however, that also means imports such as food and electronics will increase in price so expect inflation. Just as the Bank of England may be forced to reduce interest rates to try and stimulate growth, that may increase inflation and if the Brexit fall out worsens then we will have stagflation on top of record levels of sovereign and personal debt.
Remember the old war movies when the soldiers were pinned down in a foxhole losing the battle and then something gets thrown in with them? There were usually two seconds of silence then someone shouted GRENADE! Yup in economic terms that’s Brexit and remember the mug that always throws himself on the grenade to save his comrades, well in this scenario Westminster thinks that’s Scotland’s job. We export far more than the rest of the UK on a per head basis, our population is not growing at the same rate so we need skilled EU migrants, we get far more in EU grants per head than the rest of the UK and the first sector Westminster will sacrifice to get a better EU trade deal is the Scottish fishing sector. Leaving the EU will hurt the UK economy but it could crucify Scotland’s.
The second notable conclusion is that the EU seems to be remarkably resilient and even possibly boosted as business people anticipate the ability to take market share away from UK based companies. Germany and France will now be the two major players in the EU and they will be looking to carve a deal that benefits their economies, not the UK’s.
Brexit has already thrown the markets into disarray, forced to pound to fall to 1985 rates against the US dollar and seen a slump in banking shares but I personally don’t think market volatility is as damaging long term to the economy as PMI falls – any BOE action such as quantitative easing will aid the banking sector not the wider economy or real people as we have previously pointed out.
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