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+++18 September: Spirits stay stolid in anticipation of a Brexit deal+++
Close observers of our UKES will spot it outright: The expectations component’s graph looks somewhat different to previous updates. That’s because with regard to the increasing debate about stagnating real wages in the UK and their elevated importance for consumer confidence, we have re-specified the expectations component accordingly. The most obvious deviation from the component’s former plot is that over the course of the past two years, i.e., the period uniquely characterised by the ups and downs of the Brexit process and its related repercussions in the economy. During that period, the expectations component has tended sideways, if noisily, while the state component has established a downward trend. The latter, however, after a revision of the previous update’s data appears to have stopped that negative trend for now, levelling out at roughly six points over the summer. The main indicator graph, hence, has been stagnating, mirroring the decent yet lacklustre performance of the UK economy for the time being. Indeed, the expectations component – in its re-specified form even more so than before – has been finding support at the main indicator line time and again over the past fifteen months, signalling relatively stable confidence levels among British households and businesses in anticipation of a Brexit deal. On a more detailed level, both the services PMI as well as gross fixed capital formation have surprised to the upside in the recent past, depicting an even more sanguine wait-and-see mode of the UK economy than expected. The next weeks will show whether that sangfroid can hold.
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.
Business confidence (Sep.)
Services PMI (Sep.)
Consumer confidence (Sep.)
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