It is still early days, but the UK economy should avoid the immediate post-Brexit vote recession many forecasters had predicted.
That was the main message of the economic data released by the Office for National Statistics (ONS), which included the first piece of hard evidence of how the UK performed after the 23 June vote to leave the EU.
The ONS said the service sector, which makes up around 80% of the UK economy, expanded by 0.4% in July, a month in which surveys showed business and consumer confidence crashing and the financial markets in turmoil. In the circumstances, that’s a pretty impressive performance and analysts are already revising up their forecasts for growth in the third quarter. On the basis of still limited evidence, they are penciling in 0.4-0.5%.
Hopes of avoiding a recession were also strengthened by the upward revision to growth in the second quarter, from 0.6% to 0.7%. The economy had plenty of momentum before the Brexit vote, and while it is likely to slow in the second half of 2016 there will not be the necessary two consecutive quarters of falling output to fulfil the technical definition of a recession.
Much less welcome for the government was the news that Britain’s balance of payments deficit, which stood at an alarming 5.7% of GDP in the first three months of 2016, widened in the second quarter.
A deterioration in the UK’s trade performance was largely responsible for the country diving deeper into the red, with the scale of the deficit highlighting the unbalanced nature of the economy. Put simply, domestic producers are unable to keep up with consumer demand.
The fall in the value of sterling after the Brexit vote will make exports a bit more competitive and will check consumer spending by making imports dearer. But turning round the balance of payments is a huge challenge, and would have been even had the vote in the referendum gone the other way.
In terms of policy, the post-Brexit resilience will make the Bank of England think twice before cutting interest rates again in November from the already record low of 0.25%. Threadneedle Street may want to keep its powder dry for later, leaving the field clear for the chancellor, Philip Hammond.
Stimulus in the autumn statement still looks probable despite the upbeat growth news. That’s because the uncertainty caused by the Brexit vote will have more of an impact on longer-term business decisions than on consumer spending.
Hammond would be well-advised to pause deficit reduction for the two-year period when the UK is negotiating the terms of Brexit, using the extra £30bn headroom to finance public investment. That would provide double benefit: it would ensure that the economy continued to grow, and it would make that growth less unbalanced.
