728x90 AdSpace

Latest News
October 28, 2016

The Calm Before the Brexit Storm

By Benjamin Shepherd, Investing Daily
While the UK economy seems to be more resilient than expected after the Brexit vote, you should still approach the country with caution. The better than expected third-quarter growth didn’t come from particularly reliable sources and, without a framework for the exit yet, it could still get ugly.
In a bit of good news for the pro-Brexit crowd, the UK’s economy turned in better growth than expected. Britain’s GDP rose by 0.5% in the third quarter, slower than the 0.8% growth in the second but well about the 0.3% economists had predicted. All of that growth came from the country’s services sector, though, with both construction and manufacturing contracting in the quarter.
For instance, while some high-profile construction projects are continuing on, such as Axa Investment Managers Real Assets construction of the tallest tower in London’s financial district, most builders are taking a wait-and-see approach. That must have fed into the construction sector’s 1.4% decline in the quarter. While the construction of private homes doesn’t appear to have slowed much, the Royal Institution of Chartered Surveyors recently released a report that commercial projects have dropped off a cliff. The report laid the blame squarely at the feet of the Brexit vote, as projects have had trouble securing both financing and contractors from across the channel.
Industrials didn’t fare as well as expected in the third quarter either. While the volume of orders and output both rose thanks to the sharp decline in the pound, it wasn’t enough to offset weakness in domestic demand so the absolute value declined. That pushed industrial production down 0.4% while manufacturing fell 1%. With all the uncertainty around the Brexit, that situation doesn’t seem likely to improve anytime soon.
I’m also concerned that the growth in the services sector didn’t come from sustainable business. Transport, storage, and communications showed the strongest growth in the services sector, up 2.2%. That’s mostly attributable to the country’s film industry, which wrapped a couple of major productions in the quarter and had strong box office performances. I enjoy a good movie as much as the next guy and I don’t want to minimize the real contribution the arts can make to an economy, but you can’t depend on the film industry to keep growth going.
At this point, it just doesn’t look to me as though there’s enough data to make any firm assumptions about how the Brexit will play out. The biggest open question right now is how financial services will be impacted, especially since they contribute about 10% to the UK’s GDP. While Prime Minister Theresa May has said she’s aware of the importance of financial services to the country, she has yet to give any hint as to what sort of deal she expects to get as far as access goes to the EU.
That’s a big problem. While the UK is an undeniably important piece of the EU economy, the fact is the UK is more reliant on the EU. That doesn’t exactly give May a position of strength going into negotiations. There’s already talk that the EU is likely to require UK banks to work within the regulatory regime they have been and all future EU regulations that may be introduced, which isn’t likely to sit well with the pro-Brexit crowd.
Courtesy of Benjamin Shepherd, Investing Daily (More from Investing Daily Here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

© EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle

  • Blogger Comments
  • Facebook Comments
Item Reviewed: The Calm Before the Brexit Storm Rating: 5 Reviewed By: EconMatters