April 19, 2017

Fathom’s Chart of the Week: Brexit weighs on UK economy

by Fathom Consulting

According to Fathom’s model, which combines monthly production data with information from surveys, UK economic growth slowed to 0.4% in the first quarter of 2017. If correct, this would represent a marked slowdown from the 0.7% recorded in the final quarter of 2016.

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Both survey and non-survey indicators point to a deceleration, suggesting that Brexit is beginning to weigh on the economy. The downturn in output over the first two months of this year appears to have been widespread, with some sectors witnessing outright contraction. Indeed, activity in the production and construction sectors fell by 0.9% and 1.8% in the two months to February, respectively. In spite of this, with October’s dip weighing on the fourth quarter average, UK production industries may manage to eke out positive quarterly growth of 0.7% in Q1. Meanwhile, we estimate that private service sector activity, which accounts for 55% of output, expanded by around 0.4% over the first quarter.

For the year as a whole, we forecast real GDP growth of 1.1%, slowing to 0.4% in 2018. This compares unfavourably with most forecasts, which have been revised higher in light of the unexpected resilience of the UK economy post Brexit vote. The divergence between our forecast and the consensus reflects our view that developments through the second half of last year were a case of ‘pain deferred’, rather than ‘pain avoided’. To that end, British Prime Minister Theresa May’s call for a snap general election to strengthen her position before the slowdown materially feeds through makes sense from a timing perspective.


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