News & views

Wednesday, September 14, 2016

The vote to leave the EU on June 23 reshaped the UK’s political landscape. But how has the economy fared since the outcome of the referendum was announced? We take a look at the initial consequences of the Brexit vote – and the uncertainties that remain.

The Brexit vote sent shockwaves through the UK’s political landscape, posing new questions about the country’s economy and its place in the world. 

Over the summer, we looked at what implications the referendum result might have for certain key industries, ranging from agriculture through to construction.

But now that – for the time being at least – the dust has begun to settle following Britain’s decision to leave the European Union, it’s time for us to take a fresh view of what it means for the wider economy. From consumer spending and manufacturing through to employment and the property market, what trends and uncertainties should businesses now consider?

Short-term disruption
Three months on, it’s clear that the Brexit vote caused significant short-term turbulence. Both the FTSE 100 and the more domestically-focused FTSE 250 dropped dramatically on June 24, with Sterling crashing against the US dollar. 

There was major disruption in Westminster too, with Prime Minister David Cameron resigning, later to be replaced by Theresa May. A feeling of nervousness developed, as economists offered quick-fire forecasts covering everything from house prices and the UK’s credit rating through to the country’s gross domestic product (GDP).

So how has the situation changed since late June? Following a busy summer in the markets and the appointment of a new government, the outlook for the economy appears slightly less perilous. But with economic indicators both up and down, much is still uncertain… 

Stock markets bounce back
Britain’s stock markets have made an impressive comeback since the turbulence of June 24. After an 8% plunge immediately after the referendum result,[SC1]  the FTSE 100 was quick to make up its losses. The FTSE 250 also recovered over the following months, hitting a 14-month high at the end of August and reaching 20% higher than its post-Brexit low.[SC2] 

In the currency market, Sterling is taking more time to recover and remains relatively weak against the dollar. On the one hand, this may prove beneficial to companies that export products. For instance, manufacturers shipping goods overseas could prosper. On the other hand, costs could rise among those reliant on imports. For example, restaurants importing food products from abroad may face higher prices – and therefore lower profit margins.

Over the summer, there were signs that foreign holidays were becoming more expensive for UK travellers because of the weak pound. In the long run, this may benefit domestic tourism businesses, as people avoid foreign climes and opt for so-called ‘staycations’ instead.

Mixed picture for property market
Ahead of the referendum, concerns were raised about a potential house price slump in the event of a Brexit vote. With mixed signals emerging from the property market over the summer, it could take some time for a clear picture of buyer and seller confidence to appear.

Bank of England data released on August 30 revealed that the number of mortgage approvals made to home-buyers dropped in July, reaching its lowest point in a year and a half.[SC3]  But just a day later, Nationwide’s housing market survey said property prices grew by 5.6% annually in August, hitting more than £206,000 on average.[SC4]  The Royal Institution of Chartered Surveyors also highlighted how some of its members feel the referendum has only had a modest impact on housing market activity so far.[SC5] 

With so much conflicting evidence emerging, property owners may need to take a wait-and-see approach for the time being.

Question marks over consumer confidence
A drop in consumer spending was another major worry for businesses ahead of the EU referendum, with retailers in particular voicing concerns. But just as with the housing market, the news in this area has been both positive and negative.

Retailers have had to navigate some choppy waters, with August proving to be a particularly difficult month. Research published by the British Retail Consortium and KPMG on September 6 said retail sales slipped during the month. Total sales were 0.3% lower, as shoppers became distracted by warm weather and the sporting action in Rio. Like-for-like sales were down by 0.9%.[SC6] 

On a more positive note, a Consumer Confidence Index compiled by GfK suggested on August 31 that Britons are still keen to carry on shopping in the long run. The index recorded a five-point rise in people’s expectations for their personal finances, and their outlook regarding the general economic situation climbed 11 points. However, these figures were still three and 25 points lower respectively than they were in August last year, suggesting retailers should remain cautious.[SC7] 

Consumer confidence may have been buoyed by positive employment data published over the summer. The Office for National Statistics (ONS) revealed on August 17 that the UK’s employment rate had reached a record high of 74.5% in the three months to June. Just 1.64 million people were out of work, down by 52,000 over the quarter.[SC8] 

Whilst offering cause for encouragement, it’s important to remember that these ONS figures relate to the period just before the EU referendum. Confidence levels among employers and consumers may change direction as more up-to-date job figures trickle in.

Fragile business confidence
In the broader business world, the Brexit vote has had some positive side-effects, with the falling pound boosting exports. Despite this, the overall confidence of business owners appears fragile.

On August 23, the CBI’s Industrial Trends Survey recorded a two-year high in manufacturing export orders, thanks to the falling value of Sterling. Total orders were also significantly above the expectations of economists, reaching a level of minus five in August, compared to predictions of a minus 10 fall.[SC9] 

There was also encouraging news for firms in the services industry on September 5, with a Markit/CIPS Purchasing Managers’ Index pointing to strong growth in August. With scores above 50 representing growth rather than a contraction, the index climbed from 47.4 in July to 52.9. Markit said the services sector is now essentially back where it was before the June referendum.[SC10] 

Clouding the picture slightly is another recent survey published by Lloyds, which has pointed to relatively weak confidence among British businesses overall. The bank’s business barometer said confidence fell by 13 points in August, to 16%.[SC11] 

Adjusting to new uncertainties
While some positive surveys have emerged since the Brexit vote, a mood of uncertainty continues to dominate. There are questions over when Article 50 of the Lisbon Treaty will be triggered, to formally initiate the UK’s departure from the EU. And while the Bank of England’s decision to cut interest rates to 0.25% might benefit mortgage holders and businesses looking to borrow, it’s unclear whether further interventions will be needed.

Some economists have been pleasantly surprised by the trends seen over recent weeks. But others have sounded a note of caution, suggesting the third-quarter GDP figures in October may offer a more solid indicator of where the economy is heading.

Ultimately, Brexit is likely to impact some sectors more than others, meaning firms will have to be flexible in response to new uncertainties. Company leaders might need to change the profiles of their businesses – perhaps diversifying into new areas, shifting away from certain markets or rethinking internal structures.

As businesses adapt to the economic and political implications of Brexit, insurance brokers could offer a valuable source of advice. Brokers will be able to discuss the emerging risks that companies face, while highlighting the commercial insurance products which can be tailored to their changing needs.


 [SC1]Source: http://www.bbc.co.uk/news/business-36611512

 [SC2]Source: http://www.thisismoney.co.uk/money/markets/article-3757079/FTSE250-soars-14-month-high-closing-20-post-Brexit-low.html

 [SC3]Source: http://www.thisismoney.co.uk/money/news/article-3764857/UK-mortgage-approvals-fell-18-month-low-July-according-Bank-England-data.html

 [SC4]Source: https://www.theguardian.com/business/2016/aug/31/uk-house-prices-edge-up-in-august-nationwide-says

 [SC5]Source: http://www.ftadviser.com/2016/08/11/mortgages/mortgage-data/house-price-growth-runs-out-of-steam-for-now-rics-nMjb4tPCRtcMBDRrT8RBJI/article.html

 [SC6]Sources: http://www.brc.org.uk/brc_news_detail.asp?id=3013&kCat=&kData=1/ and material from the PA wire

 [SC7]Source: http://www.gfk.com/insights/press-release/uk-consumer-confidence-index-rises-five-points-after-recent-brexit-falls/

 [SC8]Source: http://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/august2016

 [SC9]Source: http://www.cbi.org.uk/news/manufacturing-bolstered-by-exports-according-to-latest-cbi-survey/

 [SC10]Source: http://www.bbc.co.uk/news/business-37274279

 [SC11]Source: http://www.lloydsbankinggroup.com/Media/Press-Releases/2016-press-releases/lloyds-bank/uk-business-confidence-falls-back-in-august/