Taking the UK's post-Brexit economic pulse

Latest data suggest that the UK economy shrugged off the result of the Brexit referendum, with retail sales last month rising by 1.4% relative to June whilst the number claiming unemployment benefits fell in July for the first time since February. These numbers do come as a surprise, particularly given the immediate uncertainty in the wake of the referendum held two months ago. They would also appear to vindicate those who thought that Brexit would not cause much damage to the economy. Indeed, the recent collapse in the pound may have contributed to the strength of retail sales, with the ONS suggesting that there was “anecdotal evidence … suggesting the weaker pound has encouraged overseas visitors to spend.” Against that, the collapse in the currency also triggered an outsized gain in producer input prices in July which rose by a larger-than-expected 3.3% versus the previous month.

So what to make of it all? The good news is that the consumer may have experienced a brief wobble in the wake of the referendum but has since shrugged off any woes. But we should not go overboard. For one thing the pickup in inflation, which looks to be heading our way, will squeeze real income growth so we may find that there will be a slowdown in consumer activity over the next twelve months. Not on the same scale as 2008, of course, but enough to curb the contribution of consumer activity to overall growth. Second, corporate data, notably the PMIs, suggest that companies have been much more cautious. If evidence begins to emerge that they have cut back on investment or hiring, we may yet see some evidence of a Brexit shock in the employment and retail figures.

But for all that, the data do come as a pleasant surprise, especially in view of the fact that the NIESR estimated overall activity contracted in July – a view which may be revised in view of the strength of retail sales data. We will, of course, need further confirmation as to how well the third quarter GDP figures panned out, and it is still early days with a lot more evidence still to come in before we can even make a guess for July. Two things strike me, however:

1.  The immediate aftermath of the referendum is fading away like a very bad dream. It is thus likely that at least some of the cries of anger expressed in the Brexit vote will become less strident now that people have had their say. This in turn means that the government will take its time before implementing Article 50, with some newspaper reports last weekend suggesting it could be delayed until 2019;
2.  A lot of the economic forecasts made in the immediate aftermath of the referendum were constructed against the backdrop of considerable political uncertainty, which faded once Theresa May obtained the keys to 10 Downing Street. This in turn suggests that we may see some upward revisions to some of the more pessimistic UK growth forecasts as political life turns more tranquil (although this may simply reflect the calm before a greater political storm).

However, before we all get too carried away, let us remember that the UK has not yet left the EU. Anyone crowing that recent figures support the view that Brexit is not the disaster it is cracked up to be, should remember a couple of things. First, it is actually leaving the EU – with all the consequences that entails – which will be decisive for the UK’s economic future, not simply the decision to go. And second, the impacts will be felt over a period of years, not months. One swallow may not make a summer but lots of crows add up to a murder.