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UK GDP update: did Brexit avert a boom?

Posted on Tuesday, December 20, 2016 at 12:30PM by Registered CommenterSimon Ward | CommentsPost a Comment

UK GDP is on track to rise by about 0.4% in the fourth quarter, while the currently-reported 0.49% increase in the third quarter may be revised up slightly. Assuming a 0.9-1.0% gain across the two quarters, and no revisions to earlier data, GDP will rise by 2.1% for 2016 as a whole, versus 2.2% in 2015. Solid performance was predicted by monetary trends and growth would probably have been significantly stronger but for the Brexit referendum.

Services turnover numbers released yesterday suggest that output in the sector rose further in October, offsetting declines in industrial and construction activity. GDP is estimated here to have been 0.2% above its third-quarter level in October, while third-quarter expansion seems likely to be revised up by several basis points.  If GDP were to rise by 0.15% per month in November and December – in line with estimated average growth between June and October – the increase for the fourth quarter as a whole would be 0.4%.

Such an outcome would be broadly consistent with simple tracking estimates based on vacancies and the CBI’s expected growth indicator – a composite business survey measure.  Both the rate of change of vacancies and the CBI indicator have eased recently, with the latest readings suggesting quarterly GDP expansion of 0.31% and 0.50% respectively – see first and second charts.

GDP growth of 0.9-1.0% in the third and fourth quarters combined would compare with official / consensus forecasts of stagnation or recession after the Brexit referendum. Some Brexit supporters cite respectable GDP expansion as evidence that the referendum result has had little if any negative economic impact. An alternative view is that the economy would have expanded much more robustly in the absence of the vote.

Monetary analysis supports the latter view. Six-month growth of real non-financial M1 rose strongly between September 2015 and June 2016, suggesting that GDP would have accelerated in the second half of 2016 and into early 2017 in the absence of the Brexit vote shock, allowing for the usual six- to 12-month lead – third chart. The two-quarter increase in GDP reached 1.8% in the second quarter of 2014 after real non-financial M1 growth reached a similar level in the third quarter of 2013. Assuming that similar expansion was in prospect before the vote, a GDP rise of 0.9-1.0% during the second half of 2016 would imply a Brexit growth drag of as much as 0.75 percentage points (pp), or 1.5 pp at an annualised rate.

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