Schroders Quickview: UK economy robust before Brexit vote

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.