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How is the UK economy weathering the political turmoil?

26 April 2019

The uncertainty surrounding Brexit means that many companies are delaying investment and making plans to relocate operations out of the UK in the event of a no-deal Brexit. A potential leadership challenge for Prime Minister, the rise of the Brexit party, European elections and the threat of a general election leading to a possible Labour government are all adding to the uncertainty. 

Against this backdrop, one could expect the UK economy to be suffering. However the latest data shows a somewhat rosier picture. Unemployment is currently at 3.9%, the lowest level in over forty years. Average weekly earnings are up 3.5%, ahead of the retail price index (RPI) which is up 2.4% over the last year. These moves have been reflected in higher tax receipts. Borrowing over the last financial year, April 2018 - March 2019, dropped by £17.2 billion to £24.7 billion, the lowest level in 17 years.

On the other hand, soft data from economic surveys appears to suggest a bleaker outlook, particularly for the service sector where the Purchasing Managers' Index (PMI) has fallen to 48.9. A PMI below 50 indicates a contraction in the service sector. This constituted the lowest level since July 2016, when the PMI dipped on the Brexit vote. On this measure, manufacturing, which is a smaller part of the economy, is doing relatively well but this could be due to companies building inventories ahead of Brexit.

If the economy continues to prosper and borrowing is reduced, it will leave some room for the Chancellor to be more generous in his October budget. This, along with a strengthening economy, would lead us to expect interest rates to rise. The unpredictability of Brexit is keeping the Bank of England on hold for now. 

On the political front, low unemployment, wages rising more than inflation and a falling deficit should increase support for the incumbent Prime Minister. Sadly, the mess that has surfaced as a result of the Brexit process appears to be the overriding factor in the opinion polls. 

Data Source: Bloomberg and The Office of National Statistics

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