Be careful of reading too much into UK economic figures

While the UK has a new prime minister in Theresa May, and a newly created secretary of state for exiting the EU in the form of David Davis, the actual implementation of Brexit remains at best a medium-term prospect.

Mrs May has already indicated that Article 50 won’t be triggered this year, and perhaps as a result of this ‘keep calm and carry on’ stance the UK economy has started to shrug off fears of a recession for now. The UK Services PMI data for August, released at the start of September, shows a move to expansion as it increased from 47.4 in July to 52.9 in August – anything above 50 indicates growth. This, combined with the latest UK Manufacturing PMI figures, which show an increase from 48.3 to 53.3 in August, suggest the economy is not quite at death’s door.

Adrian Lowcock, investment director at Architas, points out: “Business confidence has rebounded strongly in the UK following the initial shock of the vote to leave the EU. The figures follow on from strong manufacturing PMI figures last week. Both indicate the UK is moving from contraction into expansion. However, investors should be careful of reading too much into the confidence figures as they are likely to have overshot as businesses gave a sigh of relief that things did not turn out as bad as expected.”

He claims: “The UK’s economy could be entering a bit of a sweet spot as it benefits from the fall in the pound, as well as the central bank’s interest rate cut and quantitative easing. At the same time the UK could remain in the single market until the end of the decade. However, there are headwinds on the horizon: the consequence of a lower pound is rising prices. Both input and output prices are at five-year highs, indicating inflation might pick up sharply, which could restrict any improvement in the economy.”

Aside from the improvement in business confidence, equity markets have also rallied since the sharp decline experienced at the end of June in the wake of the result. The FTSE 100 index is hovering around 6,700, as of September 15, compared with 5,982 on June 27 and a low on June 24 of 5,789. The FTSE 250 index suffered more following the vote, having briefly reached a low of 15,210 on June 24 before rebounding to a level above 17,500 by September 15.

The effect of the vote on the UK economy is still unclear and the data has swung quite wildly from one extreme to the other. Adrian Lowcock

Of course, this doesn’t mean the worst is over, with the summer lull ending and parliament back in action, work on what a Brexit will look like is starting. This combined with the US election in November and a continued divergence in global monetary policy between those who plan to raise interest rates – such as the US – and those likely to cut them further (the UK) means the global outlook is set to remain uncertain.

But while low inflation and low interest rates are good news for some parts of the economy, the decline in sterling against other currencies, particularly the dollar, could have both positive and negative consequences.

Chris Beauchamp, chief market analyst at online trading platform IG, adds: “The immediate fears of an economic apocalypse have receded, with activity, job growth and confidence all holding up well. One area of concern will be an acceleration in input prices, caused by the sharp fall in the pound. It is this that will concern Mark Carney and the Bank of England, even if they have been seeking higher inflation for years. Sterling surged following the news [of PMI figures], although it is only back at levels against the dollar and euro last seen in the immediate wake of the Brexit vote.”

Mr Lowcock adds: “The effect of the vote on the UK economy is still unclear and the data has swung quite wildly from one extreme to the other. While we believe a recession will be avoided, there will be some winners and losers. With markets having rallied strongly since the vote, investors need to be diversified, not just across global equities but across different asset classes.”

Nyree Stewart is features editor at Investment Adviser