UK: Brexit Takes an Early Toll - ING
James Knightley, Senior Economist at ING, suggests that the business
surveys, employment numbers and sentiment data suggest that
Brexit-related uncertainty is weighing on the UK economy.
“Tomorrow sees the release of 1Q GDP data with the real threat that it will show the weakest quarterly growth number since 4Q12. After a decent start to the year, where January data had looked strong with retail sales and business surveys performing well, there has been a rapid loss of momentum in February and March.
Purchasing Managers’ Indices dropped to levels consistent with GDP growth of around 0.3% while retail sales contracted in both months and employment growth slowed markedly in the three months to February – in fact unemployment actually rose 21,000 during the period.
It is likely that much of this weakness is related to anxiety over the UK’s referendum on EU membership. Businesses appear to be particularly worried with a recent survey of Chief Financial Officers by Deloitte’s suggesting that Brexit fears are the biggest issue for UK companies right now. This has led to a steep drop in risk appetite with expectations for hiring new workers and capital spending at three-year lows. Consumers are also becoming more cautious with consumer sentiment having dipped, driven by a big drop in how households feel the economic situation will develop over the next 12 months.
In terms of tomorrow’s GDP report we see some downside risk to the 0.4% QoQ consensus prediction. We slightly favour a 0.3% outcome given the very poor industrial production numbers and construction output data, which have been contracting recently. We feel that this is too much of a drag for services to offset enough to get a 0.4% rate. This loss of momentum will make it even more likely that the BoE will prolong the period of ultra-loose monetary policy, which is likely to keep sterling under pressure.”