After the referendum on June. 23, 2016, the British economy has followed a lower profile. This comes from changes in expectations: uncertainty about Brexit rules has created a wait and see behavior and opportunities in other countries have changed people and companies’ mind about investing in the UK.
Therefore the economic trend has changed. We can see that in the graph below. The trend from the start of the recovery in 2013 to the second quarter of 2016 has been extended to the first quarter of 2018. There is a widening gap between real GDP measured by the ONS and the pre-Brexit trend. It the cost of Brexit for the UK. We see a real change after the referendum. Continue reading
During the first quarter, growth was robust in the US and in Spain, slightly lower than expected in France and weaker than anticipated in the United Kingdom.
The first graph shows the GDP quarterly change since 2015, the annual average growth for the last 3 years and the carryover growth for 2018 at the end of the first quarter.
The US growth was, for the first quarter, at the same level than the 2017 average at 2.3% Nevertheless, the figure is slightly lower than the last three quarters of 2017. The impact of the strong fiscal policy is not seen yet in these numbers. The carry over growth for 2018 is at 1.7%.
The 2.2% trend seen since the beginning of 2011 is still the framework for the US growth dynamics. (see the graph on the French version of this post)
In Spain, growth figures are strong since the beginning of 2014 even if the momentum has been a little lower for the last three quarters. The trend is almost linear at 3.2% since 2014. The carryover growth for 2018 is 1.8%
In France, growth was just 0.3% (non annualized) after 0.7% during the last 3 months of 2017. In fact the first quarter figure is just a correction after the 2017 non-sustainable path for the French economy. The current trend (since 2013) is 1.3% for France, therefore 2% was too much to be sustainable. I maintain my growth forecast at 2%.
The carryover growth for 2018 is 1.2% at the end of the first quarter.
In the UK, the trend is clearly weaker since the Brexit referendum. The second graph shows the real GDP level and the trend calculated from 2014 to Q2 2016 (the referendum was on June 23). We see that there is a huge and enlarging gap between the trend and the real GDP profile. It is the cost associated with the Brexit decision. There is no reason to see a reversal in this gap. The carryover growth for 2018 is 0.7%.
At a conference in London, I listened to a Welsh member of the European Parliament’s statements on Brexit this afternoon.
A number of points are worth noting on this MEP’s remarks:
The first point is the intention that has already been stated elsewhere of standing against the whole world to make Brexit a success, and this triumph requires the support of the entire British population.
[Comment: no objections from the floor] Continue reading
Agreement on the Brexit “divorce bill” is very good news, involving the UK settling its outstanding commitments to the rest of Europe. Trade negotiations will now be able to start and they will not be straightforward, as Michel Barnier recently explained with the backing of the remaining EU 27. There will be no exceptions to the rule, the UK cannot have a tailor-made agreement, all sectors will be treated equally with no special allowances. Continue reading
The Bank of England has increased its main rate by 25 basis points to 0.5%.
Two reasons to explain this movement
1 – The British economy has changed and its productivity trend is much lower now than before the crisis. This means that the risk of overheating is associated with a lower growth rate than before the crisis. Therefore the BoE has to move more rapidly than in the past, the equilibrium BoE interest rate is lower.
Nevertheless, if Brexit is a source of weakness according to the BoE it is not a source of rupture (this can be discussed). The economic scenario of the BoE is quite optimistic as it suggests that productivity growth could improve converging to the momentum seen in other developed countries. Continue reading
The economic prospects in the Euro Area are clearly on the upside in September. The synthetic index which is a weighted average of the manufacturing and services indices is at its highest since April 2011. This suggests a rapid growth figure for the second part of 2017.
The manufacturing index is at its highest since February 2011 and the index for services is close to top levels seen at he beginning of the year.
Growth and employment are on the upside. It’s time for the Euro Area to create conditions for a long term sustained growth strategy with structural reforms locally and for the European institutions
The graph compares the composite indices for the 4 major countries of the Euro Area plus the United Kingdom
The French economic momentum is now close and in phase with what is seen in Germany pushing the Euro Area dynamics on the upside. Spain remains a major contributor. It’s hard for Italy to follow the other 3 notably in the service sector.
The question of Spain is important: it has been a major contributor to the EA growth since 2014 but internal troubles after the referendum in Catalonia could create a less homogeneous trend in Spain and could damage the EA prospects. For the moment the uncertainty remains high.
The United Kingdom does not take advantage of the contagion that may come from the Euro Area. We see that since mid-2017 there is a divergence between the Euro Area and the UK. That’s Brexit uncertainty.