UK Probably Still Heading for a 'Brexit Recession' Based On Evidence So Far, Say BofAML Analysts

Analysts at Bank of America see more risk of the UK falling into a recession than not, according to a recent economic update, analysing the data released since the referendum vote.

Without a doubt Brexit caused an economic shock, but it is still early days since the June 23 referendum vote, and economists are struggling to find a way of gauging how badly it has impacted on the economy.

No hard data has been released for much of the period after the vote, but on Friday July Purchasing Manager Indices will be released for Manufacturing, Services and Construction, and these will provide the first big data insight into how the economy is bearing up, nevertheless the data will be preliminary and could still be revised at a second estimate.

BofAML’s Head of Research Tomos Rhys Edwards and his team have been scouring around for any other evidence thy can find from consumer and housing survey’s, sales figures and other company data in the period after Brexit, in an effort to try to form at least some kind of picture on how the economy has been performing.

Overall what data there is points to a slow-down in growth, and that the UK will go into a shallow recession of -0.1% growth for three consecutive quarters before recovering again:

“The data so far give us little cause to shift our economic forecasts. We look for a very mild UK recession (three quarters of -0.1% growth) followed by a gradual recovery as uncertainty fades. In other words, the data at present point to recession or stagnation, not recovery.”

Edwards points out that general ‘uncertainty’ since Brexit has risen:

“Uncertainty measures have risen sharply since the referendum. If sustained, that would be a significant headwind to growth.”

According to Edwards survey data also points to, “a large downshift in firms' investment intentions.”  

And then goes on to remark that:

“This makes sense. Heightened uncertainty should particularly affect costly irreversible decisions: business investment and property transactions. The cuts we made to our growth forecasts were heavily driven by business investment.”

Of all the risks to the economy resulting from Brexit, the fall in investment is the main challenge in the short-to-medium term.

Consumer Sentiment has fallen since Brexit reflecting concerns about the future, but actual spending has not.

“Although confidence has fallen sharply that is not always strongly related to actual spending, which is holding up. Car registrations and retail sales growth have slipped, but not sharply.”

The housing market is likely to weaken and jobless numbers may already be rising:

“Real estate agents expect the housing market to weaken markedly, which could feed through to consumer spending. Google search data provide very tentative evidence that jobless numbers could be rising. But these trends, along with the effect of sterling driven higher inflation, will likely take longer to feed through to growth than uncertainty via investment.”

Despite the negative data Edwards adds the proviso that most of the data was taken in the time of “extreme political uncertainty”  before Teresa May was elected as prime minister and was therefore not potentially very representative.

BofAML’s researcher’s end their note looking into the future at how “uncertainty” might “evolve” from here.

The most significant factor for them is how long it takes the UK to seal a trade deal with the EU and how good a deal it is for the UK.

“The $64,000 question. If uncertainty fades quickly, then the short-term economic fall-out will likely be smaller. Uncertainty might fade if the UK looks likely to negotiate a good trade deal with the EU; that would also minimize the long-term Brexit impact.”

Their base case scenario, however, is for “protracted” talks and a bad deal at the end. This, they base on recent comments from David Davis the new Minister in charge of Brexit:

“Our base case is protracted uncertainty and a poor trade deal. There is little hard evidence on how talks will pan out but what there is does not bode well for smooth negotiations in our view e.g. Brexit Minister David Davis' recent statements.”