The U.K. economy is holding its head up for now.
The 0.5 percent growth rate in the three months since the vote to exit the European Union may be a slowdown from the previous three months, but it’s faster than forecast and far from the dire warnings of recession some had predicted. Emboldening those who backed Brexit, the statistics office declared “little evidence of a pronounced effect” from the June 23 referendum.
The question now for the economy, and those charged with leading it through the messy divorce from the EU, is whether that resilience endures or soon crumbles. Prime Minister Theresa May has still to start formal negotiations or even map out her plan for the future, creating uncertainty which risks prompting banks to flee, companies to resist investment and consumers to retrench as inflation also erodes their income.
In the immediate future, the beating of the 0.3 percent expansion anticipated by economists lessens the likelihood that BOE policy makers led by Governor Mark Carney will cut the benchmark interest rate again next week. Traders now see just a 3 percent probability of a reduction after the BOE dropped the rate to a record low of 0.25 percent in the aftermath of the referendum.
“There is no need to panic,” said Alan Clarke, an economist at Scotiabank in London. He still expects a slowdown in 2017, but said the data “right here, right now have reduced the urgency to act.”
U.K. government bonds fell on Thursday, sending yields to the highest since the referendum, as investors reassessed the future path of policy. The pound erased its decline and was little changed at $1.2253 as of 12:40 p.m. in London.
The expansion marked a 15th straight quarter of growth and leaves the economy on course to match Germany and outpace the broader euro-area this year, underpinning the case of those who argue the U.K. doesn’t need to be in the EU to prosper.
“All significant indicators show the economy having a strong head of steam going into the vote and a positive recovery in the weeks since,’’ said Graeme Leach, a member of Economists For Brexit. “Uncertainty has not undermined economic performance.”
Chancellor of the Exchequer Philip Hammond, who is set to ease fiscal policy next month, said the data showed the fundamentals are “strong,” though he cautioned that “the economy will need to adjust to a new relationship with the EU.” The Confederation of British Industry today urged him to increase investment spending to counter companies’ concerns about the trading outlook.
All of this political and economic change is likely to play out over months and even years, leaving companies in the dark about the outlook.
“What is damaging first and foremost is the uncertainty,’’ International Monetary Fund Managing Director Christine Lagarde told Bloomberg Television today. “What will be the relationship? It is not healthy. For the next two-and-a-half years we know that the situation is unchanged and yet everything is changed.”
Despite being wrong-stepped by the economy’s fortitude to the shock referendum result, most economists counsel Brexit has still to happen and that its effects will take time to filter through to the economy. Inflation has already accelerated to the fastest since 2014, hampering the ability of consumers and companies to spend.
The median forecast of those surveyed by Bloomberg is for economic expansion of less than 1 percent next year, half the pace projected for this year.
“The resilient post-referendum performance does not say anything about the U.K.’s ability to perform outside of the EU,” said Kallum Pickering, senior U.K. economist at Berenberg. “Today’s data does not alter our long-term view that Brexit will lower U.K. trend growth.”