Monday, 12 September 2016

Boom or bust?

There have already been many stories about whether the economy is doing ok or tanking, or is going to do ok or tank, after the referendum. Most of this is noise rather than data, as the reliable data always lags by months. However, there are some "leading indicators" which tell us about what is happening in near real time. One is the Purchasing Managers Index, based on a survey of private sector companies and what they have actually just ordered. An index of 50 means steady, higher means growth, lower shrinkage. The first post referendum index, published in July, plummeted from 52.4 to 47.7 as buying was put on hold. The services element of the index recorded its sharpest reversal in its 21 year history. But, to put it in perspective, the record low for the index was 40.1 in November 2008. Nevertheless, it was mainly on the basis of this startling figure that the Bank of England cut interest rates. However, the next month's figure bounced back to 52.9.

So everything's going to be ok, then? Well, the British Chamber of Commerce is predicting a sharp slowdown on the basis of a slump in business investment. They are predicting 1% growth next year (the Bank of England forecast is 0.8%). This is all on the basis of "sentiment", so don't get too sentimental about it yet. The BCC expect business investment to fall by 2.2% next year and 3.4% in 2017. The previous forecasts were for growth of 4.5% and 7.4% respectively.

So it's all going to rats then? Well, David Smith noted in last week's Sunday Times (4 September) that an economist at Liverpool University had spotted that there has been a post-referendum spurt in the money supply, a measure which brings together all the different ways of calculating it ("divisia money") going up at 10.2% in July its fastest growth since current records began in 1999. Strong growth in this measure is normally associated with robust GDP growth. If that were to prove to be the case, then business sentiment would rapidly switch.

So, as usual, pick your indicator, or crystal ball gazer, and you can forecast boom or bust.

I simply note that the Purchasing Managers survey and the money supply figures are real, post referendum data on leading indicators, i.e. ones which tend to indicate what is happening rather than what has happened at some time in the past. For real post referendum growth figures we'll have to wait a few weeks yet, I expect till we get the July-September quarter, sometime towards the end of November. And even that will just tell us what has been happening recently, while we are still in the EU and, more importantly, the single market, which may not be that meaningful for the future. Other than affecting that all important "sentiment".

Whether we all keep buying stuff as businesses and individuals, giving the economy momentum, might be critical in setting the tone for the Brexit negotiation since, if the UK economy is doing well, there will be a stronger incentive for the EU countries to want to trade. Teresa May, like all PMs, needs to get lucky because, if the economy is sliding, then the opposite will hold and her negotiators will be in a weaker position.

So I'll do my bit and keep spending!

BCC forecast covered at

1 comment:

  1. I think the big Brexit economy test will be when Government presses the leave button for real! Sadly i'm not optimistic.