The Brexit risks in the UK economy
Economic data appears positive at first, but there are worrying underlying threats from Brexit
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)
Co-head of Charities
Kate specialises in investment on behalf of charities, endowments and foundations and has over 20 years of experience, with 15 years at Schroders and Cazenove. She is a CFA charterholder and has a BSc (Hons) in Natural Sciences from the University of Durham, is Chair of her local community foundation, Vice-Chair of her local primary school and Chair of the Finance Committee of the Cripplegate Foundation. She won a Women in Investment Award for her work with the Charity Commission and FCA creating a new charity investment vehicle.
She has researched and co-authored a series of publications on Charity investment best practise including 'For Good and Not For Keeps', which examines sustainable expenditure, ‘Intentional Investing’, which researches how charities can align their investment policy with their aims as an organisation, and more recently ‘Time and Money’, which explores how charities can make the best use of longevity. Kate was chair of the Charity Investors' Group for 12 years, standing down in 2019. In this role she collaborated with CFG and authored a guide to written investment policies. Kate also regularly writes on charity investment in the charity sector press.
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.