Brexit continues to dominate the news and politics in the UK. Although most of us have been hoping for a break from the mundane gridlock and circular arguments, even the moving of the deadline to October doesn’t seem to have created much breathing room for other topics. So I’m joining the bandwagon with my column this month. Not to offer predictions for the politics, but to examine the data on the economic impact so far, drawing on recent analysis by Azad Zangana, Schroders’ senior European economist.
It is clear that the medium to long-term outlook for the UK economy will be heavily influenced by Brexit. The Bank of England had downgraded its growth forecast for the coming quarters, citing a more negative impact from Brexit uncertainty than it had previously anticipated. However, UK economic growth has bounced back at the start of this year.
So what is causing this uptick? Delving into the details, we discover a worrying development. It appears that stocks of both finished goods and purchases (parts or raw materials) are both at record highs. In the run-up to the original Brexit deadline at the end of March, there were a number of anecdotal stories of both companies and government entities stockpiling supplies – for example, of medicines by hospitals and pharmacies. It appears that this stockpiling has caused the estimate of gross domestic product to rise, but without a corresponding pick-up in demand. Stockpiling will ensure there is a continuous supply of goods in the event of trade disruption. But whether the disruption hits or not, a build-up of inventories inevitably leads to a slow-down in production at a later time. This is likely to cause the economy to slow.
The Government should also take note. Celebrating the pick-up in GDP growth for the first quarter could prove to be premature. Indeed, the Chancellor, Philip Hammond, has indicated that he might need to delay the next Comprehensive Spending Review because of the delay in Brexit. Committing to a multi-year spending programme at a time of great uncertainty would be a big gamble.
And what about interest rates? The Bank of England has said it would like to raise interest rates back to more "normal" levels, but we think it is unlikely to follow through given the poor quality of growth the UK is experiencing, set against a backdrop of ongoing Brexit uncertainty. That means no change in UK interest rates for the foreseeable future.
Overall, although these growth figures might appear positive, the underlying drivers are unlikely to be sustainable. We expect the UK economy to slow in coming quarters as Brexit uncertainty persists. This should keep both fiscal and monetary policy-makers cautious for a while.
(This article was first published in Third Sector magazine)