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A new way of tracking the UK’s Brexit fortunes

Fathom Consulting

31 Mar 2017

Brexit. PM Theresa May
Photography: Christopher Furlong

How will the UK economy perform now that Article 50 has been triggered? A new measure of short-term activity developed by Fathom Consulting aims to cut through the Brexit noise.

The following commentary and opinion is provided by Fathom Consulting, who have used Thomson Reuters economic data for their analysis.

After the UK voted to leave the European Union, forecasters believed that the UK economy would slow substantially.

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Indeed, we had expected some slowdown even in the event of a ‘Remain’ vote. Yet growth picked up in the second half of 2016.

A new way of tracking the UK's Brexit fortunes chart1

Despite this, ‘pain deferred’ remains our central view.

Upside surprises through the second half of last year gave us little reason to change our assessment of the fundamental impact of the referendum, only the timing.

But this is a judgement about the most likely outcome, and we must of course be vigilant to the fact that we may be incorrect.


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Underlying activity

In August of last year, we introduced our Economic Sentiment Indicator (ESI).

Rather than attempt to forecast published estimates of GDP growth, which can be noisy from quarter to quarter, the ESI was intended to measure underlying activity based on survey responses from both consumers and businesses, produced well ahead of official data.

A new way of tracking the UK's Brexit fortunes in Thomson Reuters financial data
In January, sterling dipped below US$1.20 amid uncertainty ahead of Brexit negotiations.

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We have subsequently created similar measures for both France and Germany.

Applying a similar methodology, we have expanded the UK ESI to create our Short-Term Activity Measure (STAM).

In addition to survey results, the STAM includes a range of additional non-survey indicators of economic activity, such as unsecured credit growth and car sales.

Slower growth

Movements in our UK STAM suggest that underlying growth slowed through the first two months of 2017, led by weaker business surveys, and a slowdown in retail sales and car registrations.

A new way of tracking the UK's Brexit fortunes in Thomson Reuters financial data
Retail sales figures contributed to the weaker UK STAM reading at the start of 2017

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We expect that the UK STAM will fall further as Brexit negotiations get underway, but we remain alert to the possibility that we may be surprised on the upside, as we highlighted to clients in a recent newsletter.

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