Good, better, best

Based on the evidence of the past week, the UK economy continues to defy any Brexit-induced economic gravity. The good news is that Q3 GDP increased by a respectable 0.5% q/q (an annualised rate of 2% for any US readers) which is normally the cue for pro-Brexit supporters to break out into a chorus of “we told you so.” Even better news is that the EU and Canada finally resolved their differences over the Ceta deal, which is a positive sign for the impending trade negotiations between the UK and EU. But perhaps the best news of all was that Nissan has agreed to shift production of two models to its Sunderland plant in 2019, despite having previously warned that it would it not invest unless it could be sure that it would be compensated for any rise in post-Brexit tariff barriers. The implication of this is that foreign investors may not be quite as deterred by the possibility of Brexit as much of the conventional wisdom might suppose.

Whilst all this is obviously good news, and confirms that the world continues to turn, we should not get allow ourselves to become complacent. With regard to the economic figures, data such as tax receipts suggest that there has been more of a slowdown than the GDP release suggested. Therefore it may or may not be an accurate barometer of what happened. We know from past experience that the things we thought were happening based on the initial GDP release turned out to be misleading. The recession of 2008-09 turned out to be worse than initially reported but the double dip recession of 2011-12 turned out not to be a recession at all. So we should reserve judgment. Anyway, once the negotiations get underway, we could yet be subject to the economic shock we were warned about. It is the UK’s long-term ability to deliver decent growth in living standards in the wake of Brexit which will be the ultimate test of the economy’s resilience. 

Whilst the Ceta issue turned all right in the end, it raises questions about whether the EU is capable of delivering a deal which its constituent governments are willing to accept, particularly at the regional level. After all, if any agreement cuts across areas where national governments have sovereignty, they will have to sign it off. This could, of course, cut two ways for the UK. If Brussels acts tough – in line with the message we have heard of late – but national governments are not prepared to sanction such a hard line, that could bode well for the UK. Or maybe national governments will want a tougher line than Brussels is prepared to tread. Either way it could be a recipe for things to get bogged down, as the Brexit negotiations become a protracted affair.

Then there is the issue of what the government promised Nissan in order to persuade it to commit it to expand its plant in northern England. Business Secretary Greg Clark said only that it has given ‘assurances’ to Nissan, including the commitment to try and achieve tariff-free trade for autos. Given that the EU currently levels a tariff of 10% on auto imports, and that the UK is a key export market for many other EU manufacturers, coming to some deal in this area makes sense for both parties. The UK government went to great lengths to deny that it has offered a ‘sweetheart’ deal to Nissan and that anything on the table will also be available to other industries, so it does not look as though it was bought with the chequebook. Of course, the UK cannot speak for other EU nations and there is no guarantee that tariff-free trade can be achieved.

Nonetheless, the noises out of the UK in recent weeks suggest a far more pragmatic approach than the rhetoric which accompanied the Conservative Party conference a month ago. We still hear nonsense from the Brexiteers suggesting that the Chancellor “will be making a ‘huge mistake’ if he endorses ‘nonsensical’ figures which suggest Britain's economicgrowth will collapse next year.” But on the whole, the adults in the room appear to be exerting a degree of control. I still find it difficult to avoid the conclusion that the UK will not suffer from the Brexit fallout, and as I have long suggested this does not have to mean recession but it could mean a period of materially slower growth. We will, however, only be able to judge that after a period of many years so let’s not get carried away now.

The FX markets continue to remain concerned, with the pound vulnerable to even the apparently most innocuous of news stories. As it happens, I do believe that the pound has fallen further than the evidence currently warrants, but the more pro-Brexiteers continue to give us the benefit of their economic wisdom, the more concerned the currency markets will be. A bit of silence from these folks would go a long way towards reassuring the market.