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2019-11-13 17:13:20

Brexit uncertainty

It's not really a surprise that UK economic growth has been torpid at best over the past few years. The global economic background isn't all that great, Germany's currently in at least technical recession, China's slowing, the US tax cut boosted economy is returning to trend. And we've that one other local issue, Brexit.

As Keynes pointed out to us all the business cycle of boom and bust depends upon the animal spirits of businessmen. Business investment being the portion of GDP which varies the most and thus drives that cycle.

It's not a leap at all to point out that uncertainty - not probability, but genuine uncertainty - reduces that investment and thus is one of the harbingers of recession.

So, given that uncertainty over Brexit the British economy is currently heading around the u-bend, right? After all, we don't even know what the trading terms with our major trading partner are going to be three months in advance. Certainly we don't know a couple of years in the future and we've spent much of the past year not even knowing if anything at all is going to change.

But that's not how it has been working out. The UK economy is actually doing rather well given that uncertainty. Which is what leads to my forecast. At some point - currently January - Brexit is going to get done. The uncertainty will vanish. At which point I expect a significant uptick in British growth.

That the Brexit Party (disclaimer, I used to work for Nigel Farage but have no inside knowledge at this point) is standing down in currently Tory held seats makes a Conservative victory much more likely, thus Brexit really will get done.

We have a set of data about how that economy is doing currently.

Index of construction

Looking good:

Construction output increased by 0.6% in Quarter 3 (July to Sept) 2019, partially reversing the decrease of 1.2% in Quarter 2 (Apr to June) 2019.

And:

Trade

The trade numbers are showing, as usual, a large goods deficit and a services surplus, giving a current account deficit:

The total UK trade deficit (goods and services) narrowed £5.0 billion to £6.4 billion in Quarter 3 (July to Sept) 2019, largely because of rising exports.

In current prices, the trade in services surplus widened by £4.0 billion to £26.8 billion as exports increased £4.5 billion to £76.0 billion and imports rose by a lesser £0.5 billion to £49.2 billion in Quarter 3 2019.

The trade in goods deficit narrowed by £1.0 billion to £33.2 billion as exports increased £4.3 billion to £89.7 billion and imports rose by £3.3 billion to £122.9 billion in Quarter 3 2019.

Whether or not trade deficits are harmful is argued about but that's generally felt to be movement in the right direction.

Index of Production

This is manufacturing plus energy, utilities and mining:

Total production output was flat at 0.0% for Quarter 3 (July to Sept) 2019, compared with Quarter 2 (Apr to June) 2019; manufacturing output was also flat at 0.0%, with falls in mining and quarrying (1.7%) and electricity and gas (0.7%), offset by a rise in water and waste (1.2%).

Perhaps not quite what we'd like but that's doing rather better than many areas of the continent:

Index of Services

Given that the vast majority of the economy is services this is the most important section of GDP:

Services output increased by 0.4% in Quarter 3 (July to Sept) 2019 compared with Quarter 2 (Apr to June) 2019.

The information and communication sector made the largest contribution to this growth, contributing 0.08 percentage points.

The Index of Services (IoS) was flat between August 2019 and September 2019.

And:

GDP

All of the above are the bits, components, that we use to make up GDP. So, we have the GDP estimate:

UK GDP grew by 0.3% in Quarter 3 2019

That is, no recession:

My view

Sure, growth is tepid at best. And yet given the global slowdown, plus that Brexit uncertainty, this is a good result. We were, after all, told that this mere uncertainty would lead to a significant fall in GDP the moment we even thought about leaving the European Union.

That we've still got growth even under those burdens means I think that once that uncertainty is lifted we'll see significant growth. Assuming that everything remains on timetable I thus expect significant Q1 and Q2 UK growth

The investor view

For us as investors this is all about politics. If Labour win this coming election then Brexit won't happen on schedule in January. If the Conservatives do then it might. If it does I expect that significant headwind of uncertainty to be lifted from the economy. This would mean no further cuts in Bank of England monetary policy, indeed a possible tightening next year. It would also mean that domestically focused stocks will do well.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


seekingalpha.com Tim Worstall
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