British economy still defies Brexit – for now…

The British economy proved this morning that it is always good for a surprise: contrary to initial concerns, the unexpected Brexit vote in June has hardly done the economy any harm to date – growth has not only not buckled but economic momentum eased only negligibly during the summer months. With GDP growing by 0.5 percent in the third quarter over what was already a strong second quarter, the pace of economic growth has been extremely robust in the last few months. Annual growth even accelerated recently from 2.1 to 2.3 percent.

Does this mean the concerns about Brexit are over and done with? It is hardly any wonder that the warnings about the economic outcome of the referendum are meanwhile seen by many as scaremongering. Nonetheless, we believe it would be reckless to think that such a drastic political watershed as the EU exit will not lead to any serious consequences and that Great Britain will emerge largely unscathed from the separation process.

The Bank of England’s latest quarterly review on sentiment in the British economy also shows that the willingness of companies to invest has eased significantly in recent months and has fallen to its lowest level in six years. The current survey results signal a stagnation in investment activity. The investment climate especially in the services sector that is so important for the British economy has experienced the sharpest collapse since the financial and economic crisis eight years ago.

This also confirms our assessment: an economic state of shock failed to materialise immediately after the unexpected election outcome. The relief that greeted this also defines current sentiment in the country, such as among the private households, whose dynamic consumption contributed significantly to the good growth result in the third quarter. However, the uncertainty about Great Britain’s future relationship with the EU is currently stopping many companies from making important investment decisions – they are adopting a wait-and-see approach for now. If it turns out during the negotiations that Britain actually loses access to the single market as a result of Brexit, a growing number of companies are then likely to transfer entire business areas to other EU states. This will not happen overnight but will gradually put the brakes on the economy. We therefore predict visibly weaker growth momentum of the British economy next year with GDP growth of only 0,5 percent for the year 2017 as a whole.

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