UK: Back to normality? - ING

James Knightley, Senior Economist at ING, suggests that the UK data continues to perform well despite the worries regarding the economic implications of Brexit.

Key Quotes

“The UK’s manufacturing purchasing managers’ index has bounced strongly in August, jumping five points from 48.3 to 53.3. This leaves the index at its highest level since last October and suggests that the UK economy is weathering the Brexit storm remarkably well.

Certainly the plunge in sterling is boosting the UK’s competitiveness, which is helping to support export orders, while the aggressive stimulus from the Bank of England and the smooth transition of political leadership has also helped calm immediate fears for the economy. This has allowed firms to restart work that had been postponed in the immediate aftermath of the Brexit vote. With retail sales looking solid, it suggests that the UK will post a respectable 3Q GDP reading, albeit down on the 0.6%QoQ rate recorded in 2Q16.

Nonetheless, the risks of recession have not disappeared and with surveys still suggesting a significant pullback on hiring and investment intentions we remain concerned about the prospect of a weaker performance around the turn of the year. Inflation will continue to rise due to higher import prices while wage growth is unlikely to strengthen meaning a squeeze on real household incomes. As such we still think policymakers will have more work to do. We still think the BoE will cut rates to 0.1% and we anticipate a fiscal response too given the Chancellor’s suggestion that he will look to “reset” fiscal policy.”