The UK showed its strength in Q3, with data out last week that showed the economy grew 0.5% quarter-on-quarter, much greater than the 0.3% analysts expected. That’s 2.3% growth year-on-year. 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 coming.
That’s where we are right now — waiting for the plunge.
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 right now.
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 globally.”
A big part of that is the falling pound. As Business Insider has noted before, 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, too. Consumer 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 Elizabeth Martins:
Those downward-pointing lines at the far right should give you chills.
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 premature.”
“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.
Business Insider Emails & Alerts
Site highlights each day to your inbox.