Economic data published this week confirmed what everyone already expected; that Brexit uncertainty has weighed down on UK GDP growth. As stated during the last meeting, the Bank of England Monetary Policy Committee reported a high percentage of companies that reported elevated uncertainty about Brexit.
Economic data published on Monday confirms the Bank of England’s rhetoric and market expectations. Quarter-on-quarter GDP growth came in below consensus at 0.3 per cent. Business Investment was reported flat on the quarter and negative 0.6 per cent on a yearly basis. Meanwhile, consumer spending seems to be more resilient, with private consumption expanding 0.4 per cent. Government expenditure increased by 0.3 per cent during the third quarter.
Given that the quarterly GDP growth number was positive, the UK Economy managed to avoid a technical recession. This occurs when an economy experiences two successive quarters of negative growth. Albeit marginally expanding, the economy grew at its slowest annual rate since 2010. Year-on-year GDP growth stood at one per cent, which missed expectations and contracted compared to the previous reading of 1.3 per cent.
The UK rate of unemployment published on Tuesday fell to 3.8 per cent and exceeded market expectations of 3.9 per cent. Despite the fact that the unemployment rate remains resilient in an otherwise struggling economy, other data on the labour market was more mixed.
As reported by the Office for National Statistics (ONS), the number of employed people fell by 58,000, the biggest decrease since the three months to May 2015. The ONS also reported the fifth consecutive annual fall in vacancies, and the strongest fall since October to December 2009. Moreover, total earnings growth slowed to 3.6 per cent, missing estimates of a 3.8 per cent increase.
Inflation numbers published on Wednesday fell below expectations as consumer price inflation declined to 1.5 per cent on a yearly basis, but in line with Bank of England forecasts. This decline was mainly attributed to a lower price cap on energy prices issued by the regulator. Meanwhile, core inflation which excludes the more volatile components stood unchanged at 1.7 per cent.
GDP, labour and inflation data are considered lagging economic indicators, as they reflect the past. Since then, during the month of October, UK Prime Minister Boris Johnson managed to secure a Withdrawal Agreement between the UK and the EU and the approval of the second reading of the Bill which implements the agreement into law.
As the risk of a no deal Brexit diminished, markets are now pricing in an implied country risk premium that is significantly below three-year average, since the Brexit referendum. Albeit declining, the UK country risk premium remains elevated compared to other European countries.
Although uncertainties about the trading relationship between the UK and the EU still remain, the December 12 general election should provide more clarity on the UK’s terms of exit from the EU. Moreover, with both parties planning a substantial increase in government spending, fiscal stimulus is now also on the horizon. While not expecting an immediate turnaround, and conditional on these two factors occurring, recent developments support a possible pick up in the UK economic outlook over the longer term.
Disclaimer: This article was issued by Rachel Meilak, CFA Equity Analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.