Now that three months have gone by, it is obvious that the UK referendum is not having the catastrophic effects some had feared. This is also thanks to the economic policy reaction to the event, and does not mean that there have not been (nor will be) negative effects……
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Intesa Sanpaolo – Research Department For professional investors and advisers only
The EU 27 summit is finding itself faced with mounting centrifugal forces and the emergence of markedly different views on what the Union should strive to do and be.
On the side of its monetary policy meeting of 15 September, the Bank of England acknowledged that the UK economy has reacted better than expected to the outcome of the European Union referendum held at the end of June. The feared deterioration of labour market conditions did not materialise, and consumer spending apparently fluctuated more in function of weather conditions than of the impact of the vote on households’ sentiment. Moreover, in July the trend of manufacturing output confirmed the recovery seen in 2Q. Monthly surveys, which in July had reflected the media impact of the event, rebounded in August to pre-referendum levels. The error made by those forecasting catastrophic developments was the assumption that confidence would seriously deteriorate, which has not happened; also, pre-emptive effects on trade flows were feared, despite not having any tangible reason to materialise. However, the limited impact of Brexit is also due to three further factors. First of all, the government crisis which followed the vote was solved very rapidly, with the appointment of a moderate Prime Minister: therefore, the phase of political uncertainty was reduced to a minimum. Second, the new government has shown that it has no intention at all to speed up the process, and that it does not want an exit from the EU at all costs: contrary to the cliché by which this, by prolonging uncertainty, would have had negative effects, this approach has brought the benefit of reducing anxiety, stressing that there was no revolution lurking round the corner. By contrast, problems could begin to emerge once negotiations truly get down to business. Third, economic policy conduct reacted promptly and appropriately to counter the negative impact on demand: policy rates were cut, government bond purchases resumed, and the budget cuts announced by the previous government were called off.
Having said this, although only a few analysts continue to expect a recession in 2017, forecasts for the British economy have in any case been lowered significantly in the past few months: the average estimate of growth in 2017 has plunged from 2.1% in June to 0.7%, although it has risen back marginally in the past month. As a result of the depreciation of sterling, inflation forecasts have surged from 1.6% in June to 2.3%. The Bank of England itself continues to envisage a new rate cut if the trend of the economy proves to be in line with the path outlined in the August Inflation Report (for the time being, it is a little better than expected). The part of the analyses of the effects of Brexit that remains valid is the one that projects negative effects on foreign direct investments due to regulatory uncertainties and the possible erection of trade barriers in the next few years.
A 27-country European Union summit will be held today (without the United Kingdom). The aim is to agree on a path to follow to relaunch the Union in the face of the challenges posed by “irregular migration, terrorism, and fear of globalisation”, as well as by the UK referendum. In the past few months, more restricted summits have proliferated, both among formal groups, such as the Visegrad meeting of the Eastern States, and informal ones (the Mediterranean summit, or the trilateral summit between Italy, Germany and France). These meetings yielded incompatible agendas and diverging thrusts on key issues, as well as on general governance aspects, in some cases to the point of requesting changes to the Treaties. Furthermore, Spain is still without a government, Hungary is on a collision course with the EU, and three key states will host general elections in 2017 (Holland, France, and Germany). In such an environment, talk of a deeper union is just wishful thinking. The challenge at today’s summit will rather be to extract from the interaction of these forces a minimum set of measures on which a majority of states converge, and to offer a positive vision of the Union.
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