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+++17 April: Expectations tumble into negative territory again with services sector in contraction+++
Brexit has become the millstone around the neck of the UK economy dreaded for so long by so many; and the longer the current deadlock continues, the heavier it is to weigh business down. It is no longer necessary for Brexit actually to occur: Uncertainty does the job just as well. With a long extension or “flextension”, as it is called in the latest Brexit jargon, nodded through by EU leaders (even though with gritted teeth), the second-worst nightmare of businesses has been created: A long, undetermined postponement of Brexit when contingency plans primed for March 29 already had been activated. The expectations component of the UKES, accordingly, has dipped into negative values again – for the third time only since the result of the referendum some three years ago. By now, macroeconomic numbers mirror the weight of the millstone unambiguously. Business investment and gross fixed capital formation as a whole have been tending weaker all over the past year, consumer confidence is mired in negative double digits and above all, the services sector has been showing signs of contraction lately. Had it not been for prodigiously free-spending consumers, that contraction would have turned out even worse. Thus, our projection towards the end of last year sadly has proved correct: The opportunity has been missed to sort out Brexit in a time when its impact on the economy could have been all but averted. By now, the relevant question has become how great that impact will become eventually.
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.
Industrial prod. (Apr.)
Services PMI (Apr.)
Manufacturing PMI (May)
Consumer confidence (May)
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