Weekly Market Outlook

There’s More to the U.K.’s Economic Woes Than Brexit

It seems Brexit isn’t entirely to blame.

Almost every economist in a Bloomberg survey said that uncertainty surrounding the U.K.’s vote on European Union membership is only part of the story behind weaker economic growth this year. While it may be having some impact, only one of 31 said it’s the dominant factor.

The results suggest the softer expansion in recent months may persist even if the country stays in the bloc after Britons cast their votes on June 23. The Bank of England has said the buildup to the referendum has affected investment and hiring. But more fundamental issues continue to cloud the outlook, including the economy’s reliance on services and consumer spending and weak exports amid a gloomy global backdrop.

“Growth would be slowing even if we weren’t holding the referendum,” said Samuel Tombs, an economist at Pantheon Macroeconomics. “Certainly some of the slowdown over the past few months can be attributed to Brexit, but overall I think we’ve been seeing growth slow down because of several factors” including an intensification of the fiscal squeeze, weak exports and consumer spending reaching its limits, he said.

Cautious Spending

Economic growth slowed to 0.4 percent in the first quarter from 0.6 percent, and data published Friday showed construction orders in that period had their biggest decline since 2014, reflecting caution among clients for big projects.

House prices may decline for the first time since 2012 amid the uncertainty, and data next week are forecast to show wage growth is still failing to pick up. Speculation about potential BOE easing helped to push the 10-year gilt yield to a record-low 1.21 percent on Friday.

According to the Bloomberg survey, 71 percent of respondents said Brexit accounts for no more than half of the recent weakness. Markit Economics said this month that its industry reports signal the pace of U.K. expansion could drop to 0.2 percent this quarter. The BOE will provide an update of its view of the economy on Thursday when it announces its latest interest-rate decision.

Some policy makers have also said the slowdown may not all be related to the referendum. Gertjan Vlieghe, who has indicated a bias for loose policy, said in May that there has been a gradual loss of momentum in recent years. He wants “convincing evidence of an improvement” before he has confidence that more stimulus won’t be needed.

Kristin Forbes, who is known to favor monetary tightening, also said that the Monetary Policy Committee doesn’t have proof the slowdown is all referendum related because of a “fog over the data.” All this could mean that the BOE may not be likely to raise rates any time soon, even if the U.K. votes to stay in the bloc.

“I think that the MPC is in a very dovish frame of mind regardless of the Brexit referendum,” said Brian Hilliard, chief U.K. economist at Societe Generale. “Earnings growth is weak, unit labor cost growth is pretty low even though productivity is low — so there are no immediate signals ahead telling them they have to act hastily, or at least have to act pre-emptively, to raise rates.”