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+++18 October: Summer lull short-lived as sentiment sours and Brexit arrives at high-noon+++
It stands to be over just as quickly as it came: This summer’s remarkably strong performance of the UK economy, driven by a sturdy services sector. A glance at the expectations component as the leading indicator of our UKES shows why: Having risen exuberantly in the first months of the year, it now has collapsed to the main indicator line again, indicating the anxious anticipation of the results of the Brexit crunch summit in Brussels these very days. The state component (as it should) has followed the lead of the expectations graph with a time lag of some three months, reaching its levels of the past year only in August. From here, though, signs are for a mild set-back: Emerging from the summer boon, retail sales have begun to disappoint, and business investment in particular appears to have been retrenched over the past three months, as surveys of the Confederation of British Industry indicate. Thus, it is as we’ve been commenting ever since the turn of the year: The eventual type of Brexit now determines whether to make or break the UK economy, which has been remarkably resilient up to here. If a deal is struck in Brussels and agreed by the UK Parliament, the British economy has every potential to accelerate in conspicuous fashion, vying with the United States for the top spot. If, however, we’re right with our projection of a deal reached with the EU27 only to be voted down in the Commons, then the long-expected recession triggered by Brexit will be at our hands rather sooner than later – and this time it’s for real.
Sources: UK Parliament, Bloomberg
Our UKES is an indicator of the condition of the UK economy which, otherwise, does not exist in this comprehensive form. It consists of two components and the main index.
The component “expectations” runs ahead of the current situation, comprising elements such as development of inflation and interest rates, consumer- and business confidence, etc. The “state” component describes the current situation and comprises data such as industrial production, net trade, etc. The main index, then, is a smoothed combination of the two components.
The UKES describes the development of the British economy in the recent past rather precisely; particularly the expectations component has emerged as a valid tool for prognosis. It is calculated to scale so that a positive reading of the state component as well as the main index signals current economic expansion. Furthermore, the UKES generates these other signals:
If the expectations graph rises through that of the state component, that is a valid signal for an economic upturn in the near future (3-6 months) and vice versa for a break-down through the state graph. If the state component, additionally, plots over the main index, that signals a healthy and stable economic expansion; when it plots beneath the main index, the current economic upturn has not yet solidified or the recession is persistent, respectively.
Retail sales (Oct.)
Industrial prod. (Oct.)
Consumer confidence (Nov.)
Manufacturing PMI (Oct.)
Individual country ranges according to historic max-/min levels
Sources: US Bureau of Economic Analysis, US Bureau of Labor Statistics, US Census, Australian Bureau of Statistics, Instituto Brasileiro de Geografia e Estatistica, Customs General Administration of China, bloomberg, Institut national de la statistique et des études économiques (INSEE), UK Office of National Statistics (ONS), Trading Economics