Here Comes the Brexit-Era British Economy in Hard Numbers

Weaker demand, slower growth, faster inflation — thats the U.K. economy that the Bank of England sees in its crystal ball after the nation voted for Brexit. Now the first hard numbers are on the way.

So far, surveys and estimates have mostly — though not comprehensively — shown that the June 23 decision to quit the European Union has prompted a downturn. The Office for National Statistics will this week publish figures giving more solid clues as to whether thats the case.

If the National Institute of Economic and Social Research is right, weakness should start to appear pretty quickly. The London-based think tank estimates the economy shrank at the start of the third quarter, contracting about 0.2 percent in July alone. The BOE cut its economic forecasts by the most ever on Aug. 4, though economists say this weeks releases wont show a dramatic deterioration just yet.

At Investec, Victoria Clarke and Chris Hare said the figures will show relatively modest post-Brexit referendum effects, with significant changes coming down the line. For now, they expect early hints of upward price momentum and signs of a negative impact creeping into the labor market and public finances data.

BOE Chief Economist Andy Haldane said monetary policy cant fully insulate Britain from the long-term effects of Brexit. This is a structural shift in the U.K.s economic and trading regime, whereas monetary policy can offer no more than a short-term balm, he wrote in the Sunday Times newspaper.

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The most marked and sustained impact of Brexit on markets was the exchange rate, and thats a worry for an inflation-targeting central bank like the BOE. Releases on Tuesday will provide an insight into how fast the pounds 12 percent decline on a trade-weighted basis is driving up consumer prices. Over the medium term, the BOE expects weaker sterling will push price growth back to its 2 percent target at a faster pace than previously envisaged.

While economists see the headline inflation rate staying at 0.5 percent in July, prices of products from cars to phones have already started creeping higher as firms pay more for imports. Producer-price figures released the same day may show any early impact on companies costs.

On Wednesday, the ONS will release labor-market data. Jobless claims figures will cover July, though the more detailed ILO report — on key metrics such as employment and wage growth — will be for the April-June period. The BOE forecasts unemployment will rise to 5.5 percent at the end of next year from 4.9 percent currently.

A faltering job market combined with an upswing in prices could hit a crucial part of the economy: domestic spending. That key driver of growth has so far proved resilient. Even with consumer confidence dropping, the British Retail Consortium said that retail sales rose the most in five months in July. 

But those figures were helped by discounting, and by food and drink sales as the British summer finally got under way. The ONS will give its take on Thursday with July retail-sales numbers that are forecast to show stagnation. June saw a 0.9 percent drop, the most this year, and a BOE survey showed household spending was starting to wane even prior to the EU vote.

The week ends with the latest snapshot of the public finances. Were four months into the fiscal year, and new Chancellor of the Exchequer Philip Hammond is dropping heavy hints that government stimulus is on the way to back up the BOEs monetary easing.

Hes already abandoned his predecessor George Osbornes plan to deliver a budget surplus by 2020 and vowed to do whatever is necessary in his year-end Autumn Statement to keep the economy on track.

July is usually a good month for the public finances, with the Treasury receiving higher-than-normal receipts of income tax and corporation tax. Economists predict a budget surplus of 1.9 billion pounds ($2.5 billion), up from 1.2 billion pounds in July 2015.

But Brexit will likely take its toll before long. According to independent forecasts compiled by the Treasury last month, the deficit will total 129 billion pounds between April 2016 and March 2018, a third more than officials predicted in March.

The BOE said this month that if the U.K. economy develops as weakly as it predicts, policy makers will probably cut their benchmark interest rate again. Well see.

Release Day

Data

Forecast

TuesdayInflation (July)0.5% vs 0.5%
WednesdayILO unemployment rate (April-June)4.9% vs 4.9%
Jobless claims (July)9,000 increase
ThursdayRetail sales (July)0.1% vs -0.9%
FridayPublic finances (July)GBP1.9 bln surplus vs GBP1.2 bln July 2015

Source: http://www.bloomberg.com/

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