In the month since the EU Referendum, contagion appears to be limited and equity prices continue to rise. The risk of a spike in bond yields is looking less unlikely, so what data is there to show the global economy is improving?
Negative headlines could be hiding encouraging signs.
The latest GDP growth figure published last week showed the economy was growing pre-Brexit at a rate that exceeded most experts’ forecasts. That’s a picture of steady growth in the run up to the EU referendum.
Despite the FTSE slipping over the last 7 sessions, equities in America have had their fourth week of gains. The primary forces behind the US rally have been better-than-expected corporate earnings, stability in the banking sector and a growing sense that equities appear more attractive than bonds given low Treasury yields.
Sentiment from surveys have dragged UK shares down, such as last week’s Chartered Institute for Procurement & Supply’s latest health check on services firms. According to the survey compiler IHS Markit, the economy is on track to shrink by 0.4% in the current quarter — the first decline since the end of 2012 and raising the risk of recession.
These surveys were conducted while we were in the middle of the post Brexit political quagmire, when we had a lame duck Prime Minister and ineffectual opposition. Markets have stabilised and even the Pound has shown it still has some strength, despite the widely predicted interest rate cut from the Bank of England yesterday.
Getting a job should be easier than ever
According to data from recruitment website Adzuna collected in June there were 1.158 million positions being advertised, equating to 0.5 jobseekers competing for each post.
That is a record two vacancies for every person looking for work and no sign that Brexit has affected this immediately. It is down on the level a year ago and the lowest since the company began collating the numbers in 2012.
Preliminary data taken after the Brexit vote shows few signs in a slowdown in hiring. The volume of vacancies posted rose an average of 5.4% across the four weeks since the vote. So jobseekers have a lot to be optimistic about right now.
Further analysis by the CBI and CBRE found that 50% of businesses in London plan to continue to hire after the referendum and just 12% expect to cut employment. Many unknowns remain for the longer term, but the UK jobs market is holding its own right now and that provides a powerful basis on which the Government can negotiate with the EU.
UK economic outlook is not negative
The National Institute of Economic and Social Research (Niesr) believe there is only an “evens” chance of a UK recession over the next 18 months.
Niesr expect growth to slow to slow to 1% in 2017, down from a forecast of 2.7% April. That would see the UK avoid a technical recession – usually defined as two consecutive quarters of economic contraction.
Swift action by the Government and Bank of England could help to prevent a prolonged slowdown. We have yesterday’s announcements from the Bank’s Monetary Policy and we understand the Prime Minister used this week’s cabinet meeting to focus on the economy, in particular, reducing the North-South divide.
As we said in our recent article, Preparing For The Brexit Budget, we expect the Government to create some economic stimulus to shore up the economy.
The ultimate economic driver
As a trading nation, our economy is ultimately driven by global trade. Confounding predictions of a worldwide recession following the Brexit vote, global economic growth is accelerating sharply after months in the doldrums.
Two fund managers have independently of one another, detected economic momentum growing dramatically over recent weeks, signaling robust world growth.
Henderson Global Investors data shows a similar scenario. Its proprietary gauge shows the fastest growth since the banking crisis stimulus in the biggest developed and emerging market economies in 2008.
Fulcrum Asset Management’s ‘nowcast’ gauge of global activity is showing 4% growth over the second half of 2016 – even if there is a hiccup in the UK. This is an increase from 3.4% in the last quarter and 2.4% at the end of last year.
Fulcrum say that these are indications of the world’s economy reaching “escape velocity” after being despondent with deflation for the last seven years, as we came to terms with excessive debt.
And there is more to look forward to
- Quantitative easing worked in the UK, the US and now it is working in Europe too. The Governor of the Bank of England has suggested it could be reintroduced to help the UK through the uncertainty of the Brexit separation period.
- The US Federal Reserve’s decision not to raise interest rates four times in 2016, as they had forecast, has helped emerging markets to maintain their growth, albeit slower than previously.
- Japan has announced a giant fiscal package to kick-start the world’s third-largest economy and boost growth.
- France, Italy, and other Eurozone states have taken advantage of the Brexit scare to end austerity more quickly than planned and to prime pump their economies.
The effect of all this monetary and fiscal stimulus here and around the world could help to sustain the pre-Brexit UK GDP growth, at least in the short-term.
The combined efforts of policy makers and regulators make it hard for the headline writers to have the doom and gloom all their way.
Whether you are optimistic, skeptical or ambivalent about the economic outlook, start making your Brexit Financial Plan by clicking here.