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Tracking the U.K. Economy Through Brexit's Twists and Turns

Bloomberg Intelligence well-being index hints at trouble ahead

The British mood is shifting and the ripple effects of the decision to leave the European Union may put a further dampener on things.

The Bloomberg Intelligence Bliss Index, an amalgamation of growth, employment, uncertainty, and inflation measures, has been on a downward path since the run-up to the Brexit referendum in June. After plunging in the immediate aftermath of the vote, it now sits at 0.1 percent — just above the zero mark that divides above and below-average levels of well-being.

Excluding the post-referendum dip, the gauge is now at its lowest level since June 2013. Its jumpiness since the vote reflects a lack of clarity on Britain's negotiation tactics as well as better-than-expected economic growth and resilient consumer spending. A further decline is on the cards as the formal EU exit process kicks off and inflation picks up, according to BI economist Dan Hanson.

"Heightened uncertainty has caused the index to drop off since the referendum. It's likely the gauge will fall further in 2017 as households feel the pinch of a sterling-led bout of higher inflation. Weaker growth in real incomes could well mean consumers have the wind taken out of their sails."

Volatility in the index in 2016 was partly driven by spikes in uncertainty after the Brexit vote and the election of Donald Trump as U.S. President. It will remain elevated this year as the U.K. starts to negotiate the terms of its future relationship with the EU, a process that  —  given the rhetoric from both sides  —  could be very tough.

The BI figures tell a slightly different story than official economic data. While surveys of activity declined in the month after the referendum, as did the Bliss Index, the economy grew 0.6 percent in the third quarter, and there are signs that momentum was carried through into the end of last year.

Bank of England Governor Mark Carney told lawmakers Wednesday that the recent strength means another upgrade to the outlook is possible when the central bank publishes new estimates on Feb. 2.

But even though gross domestic product is the broadest measure of the economy and sometimes used as a proxy for well-being, critics say the measure falls short in some aspects and cannot be used as a measuring stick for a country's happiness. That happiness could be tested in 2017, according to Hanson.

"Economic well-being is hard to define. But it's clear that people tend to like economic growth and dislike inflation, unemployment and uncertainty about the future."

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