The UK showed its strength in Q3. Data out last week showed the
economy grew 0.5% quarter-on-quarter, much greater
than the 0.3% analysts expected. That’s 2.3%
Not bad. Not bad at all.
Naturally, the government and its Greek chorus of
pro-Brexit talking heads hailed this as yet more evidence
that leaving the EU will not damage Britain.
They remind me of that perennial scene in the Road Runner
cartoons, where Wile E. Coyote races over the edge of a cliff.
For a brief moment, Coyote thinks he is soaring through the air.
Only belatedly does he realise it’s too late, the plunge is
That’s where we are right now — waiting for the
This isn’t an opinion. It’s what the granular,
forward-looking data is saying about the UK economy. The UK will
leave the Single Market, it will face increased barriers to trade
(after Brexit in 2019), and the pound is sinking. These things
will weigh us down. We cannot defy gravity for long.
In the short-term, this GDP chart from HSBC makes Britain
look really good right now:
But GDP is a backward-looking measure. It tells us what
just happened, not where we might be going.
In terms of the future, here is the scariest chart
published last week (which Prime Minister Theresa May, trade
secretary Liam Fox, and Brexit chief David Davis are unlikely to
be boasting about). It shows the volume change in mutual fund
money leaving UK investments:
This is a forward-looking metric. Investors don’t bet on what
just happened (i.e. positive Q3 GDP). They’re betting on the
future. And the smart money is getting the hell out of Britain
The data was collated by HSBC analysts Robert Parkes and
Amit Shrivastava. This is what they told their clients:
“Post Brexit, international investors continue to head
for the exit. Since the Brexit vote, holdings of the UK
have fallen by more than 100 basis points. Relative to history
(on a z-score basis), the UK is now the most out of favour region
A big part of that is the falling pound. As Business Insider has
the drop in sterling is bad in the long-run for Britain
because it makes us all poorer, and it beggars anyone who keeps
their money in the UK.
Ordinary consumers are starting to catch on to this,
confidence actually dipped this month — a bad sign for
the future — because of the declining buying power of the
pound, according to GfK:
Why would consumer confidence dip if GDP is so good?
The answer is that while GDP was growing in Q3 the pace
of that growth was slowing. That’s what economies do
before recessions.Barclays analysts Andrzej Szczepaniak and
Fabrice Montagne told their clients, “Despite printing just above
our forecast, it nonetheless confirms our overarching view that
economic activity slowed post-referendum in light of rising
post-exit uncertainty.” Industrial production actually shrank by
0.4% quarter-on-quarter — a weird thing to happen given that UK
exports ought to be cheap right now.
Here is what that shrinkage looks like in a chart, from HSBC’s
Those downward-pointing lines at the far right should give you
Most analysts had predicted the economy would start slowing
dramatically in the second half of 2016. They were wrong,
apparently.Martins admitted to her clients that the current data
makes economists looks bad, as if they were backers of “Project
Fear.” The important thing, Martins says, is that while those
economists may have got the timing wrong they have
not changed their minds on its inevitability:
“In fact, despite the uncertainty, the UK looks to have seen
faster growth than the Eurozone or the US in Q3. This affirms our
view that the Bank of England will not cut rates next week, and
poses upside risks to our 2016 growth forecast of 1.8%. It will
also support the argument that economists overstated the impact
of the vote as part of ‘Project Fear’. Unfortunately, however, it
does not change our view that a slowdown is coming. We expect
investment to fall and consumption to slow next year as higher
uncertainty and costs start to weigh on the UK economy. …”
“For those who accused economists of subscribing to ‘Project
Fear’, today’s numbers will be viewed as a vindication. Indeed,
our near-term pessimism does appear to have been
“However, higher uncertainty and costs are already starting to
weigh on businesses, and could start to hit the consumer too in
the coming months. We expect investment to fall and consumption
to slow next year.”
That’s where we are right now. The UK is the Wile E. Coyote of
global economies. We’re either soaring toward greatness, or we’re
treading on thin air.
You’re in denial. The UK economy is heading off a cliff. – Business Insider