GBP/USD Loses Momentum After Data Shows 45% Fall in London Property Sales; BOE's Haldane Earmarks August

Whilst the BOE's recent meeting minutes showed there was cause for concern for the economy post-Brexit, recent data showing a slump of 45% in London residential sales confirmed Brexit is 'biting'

How badly has the economy been hit by the UK's decision to exit the EU?

The answer is it is still too early to say - for whilst financial markets have recovered reasonably well its harder to measure changes in the real economy.

Data from Lonres, however, which provides information on the London property market, has now started to provide us with a clearer view of at least one sector, and the news is not good - at least not for London property investors and agents.

The capital has seen a 45% slump in sales post-Brexit!

This is a substantial drop, regardless of prior expectations that London property would be badly hit by Brexit - due in a large part to its cosmopolitan clientele.

The news may have contributed to the pound to dollar stalling in its post-BOE rally, although of more direct significance were comments from BOE official Andrew Haldane.

Haldane, who is a known dove (which means he favours loose policy and low interest rates) said in a speech that he thought stimulus was required in August and that, quote:

"A package of mutually-complementary monetary policy easing measures is likely to be necessary".

This seemed to indicate more than just an interest rate cut may be on the cards in August, but rather an altogether larger and more robust package altogether.

GBP/USD moved down to lows in the 1.3340s on the news.

No Change

At the July policy meeting the Monetary Policy Committee of the BOE voted to keep interest rates and asset purchases unchanged.

This in itself was a kind of endorsement of the economy, since if things had been worse, the BOE would not have hesitated in cutting rates or using more QE, but they did neither.

Early Signs

Nevertheless that doesn't mean there were no problems at all either.

In the policy summary members of the BOE committee thought that there were already early signs in the three weeks after the referendum that economic activity might be weakening.

These were based on, “sharp falls in some measures of business and consumer confidence.”

There were also signs that some businesses were beginning to, “delay investment projects and postpone recruitment decisions.”

Further the analysis says that in the housing market, “survey data point to a significant weakening in expected activity.”

“Taken together, these indicators suggest economic activity is likely to weaken in the near term.” It concludes.

Banking Buttressed

On the bright side, however, the Minutes said the banking sector remained resilient in the face of the Brexit shock (CDS prices are the cost of insuring against default):

“Reassuringly, however, banks’ CDS prices and other wholesale funding spreads had risen only relatively modestly, and by less than during other historical episodes of elevated uncertainty.

"This most probably reflected the increased resilience of the banking sector owing to the substantial capital and liquidity buffers that had been built up in recent years.” It stated.

The Minutes also went on to say that financial markets had continued functioning efficiently, “throughout the period.”

“More generally, the Committee had taken some reassurance from the evidence that markets had continued to function effectively throughout the period.

"The overall resilience of the UK financial system, and the flexibility of the regulatory framework, had allowed the impact of the referendum result to be dampened rather than amplified. There had been little sign that asset prices had been distorted by impaired market functioning.”

Positive for Current Account

Fears the Current Account (CA) would widen after Brexit because of the expected fall in foreign investment have not fully materialised yet according to the minutes.

Whilst there would be some undoubted fall in foreign investment, this ought to be partially offset by a rise in exports due to the weaker sterling:

“The Committee discussed how the vote to leave the European Union might affect UK activity in the near term, and what the information available so far had indicated. The fall in sterling would provide some support to exports, and, together with valuation effects on investment income flows, lead to some reduction in the current account deficit.”

The Minutes however also talked about the negative effect of a weak currency, which is imported goods inflation.

This is considered a less stimulating influence because it results in people's real income falling:

“Less positively, any consequent rise in import price inflation was likely to impart a drag on households’ real income growth, and so dampen domestic demand.”
In addition, the minutes stated that a weak pound could have, ”negative implications for productivity.”

Post-Brexit Slowdown Panorama

The BOE noted that in previous comparable periods of uncertainty and slowing growth the old adage that “Housing leads the economy,” was pertinent:

“During previous periods when growth had slowed, the effects had often first become apparent in the residential and corporate real estate markets.”

Business investment was also likely to suffer, although it was likely to have a lagged effect, due to the delay caused by revisions to “capital spending plan".

“Household consumption was also likely to weaken in response to a weaker housing market and a softer employment outlook, though the timing of such effects was uncertain. The Committee considered each of these transmission channels and would estimate their effects in the August forecast round.”

Consumer Confidence Falling

A snap consumer survey by GfK in the weeks since the referendum had reported the sharpest monthly fall in confidence for over two decades.

However, the Minutes admitted it was too early to say by how much the slow-down would impact on GDP.  

“There had been clear evidence of a weakening in property markets, and measures of consumer and business confidence had fallen sharply; but in terms of the broader activity outlook, much would depend on the degree and timing of any further retrenchment in business investment, and the flow through to households via the labour market. Both of these were likely to take some time to gauge.”

Impact on Jobs

The minutes had already ascertained a scaling back in recruitment demand:

“Since the result, contacts of the Bank’s Agents had generally reported that they expected to scale back recruitment plans over the coming twelve months, particularly in the consumer services and construction sectors, although the majority planned to do so only slightly.

"A quarter of respondents to the survey by the Institute of Directors had said that they planned to freeze recruitment.”

Scientific Research Funding

The EU provides scientists in the UK with a lot of research and development money, which would not likely be replaced following a Brexit, and according to the bank the effects were already being felt:

“Some contacts also noted uncertainty about the future funding of research and development, some of which currently came from EU sources. Any reduction in spending on research and other intangible capital in response to heightened uncertainty had the potential, too, to hold back productivity growth.”

On the more traditional Subject of Inflation....

On inflation, there was no fresh data and it had held at 0.3% in May.

However, this was well below the 2.0% longer term inflation target set by the bank.

Measures of core inflation had been stable at little over 1.0%.

The shortfall in Inflation was due to drags in energy and food prices, however these were expected to fall in the next year.

Finally, wage growth had picked up in the months ahead of the referendum.