Schroders Quickview: UK economy robust before Brexit vote
Stronger activity before the EU referendum reduces the odds of a recession in the near term.
The first estimate of second quarter UK GDP growth shows the economy performing well in the run up to the EU referendum. The economy grew by 0.6% quarter-on-quarter, an acceleration compared to the 0.4% growth in the first quarter. The results were also better than expected as consensus estimates were looking for 0.5% growth. Year-on-year, growth was running at 2.2% - a healthy pace consistent with falling unemployment.
While this is generally good news, it is highly likely that the economy has slowed dramatically since the EU referendum. Although there will be a delay before we have official confirmation (third quarter GDP will not be released until October), early signals from private business surveys are alarming. Both the Markit purchasing managers’ indices (PMIs) and the Confederation of British Industry’s (CBI) Industrial Trends Survey suggest activity has slumped to levels not seen since the global financial crisis in 2009.
Better-than-expected growth in the second quarter is unlikely to alter the course of policymakers. Both the Bank of England and HM Treasury are plotting stimulus packages in order to minimise the damage from the uncertainty surrounding Brexit. This is likely to include a cut in interest rates in August, possibly a restarting of quantitative easing, and fiscal stimulus in the Autumn Budget Statement. We continue to place a 40% chance of a recession in the near term. What the GDP figures tell us is that the economy was on a robust footing before the Brexit shock hit.
Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. 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 Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.