Brexit Bulletin: Is the Economy Decelerating?

We’re not in the midst of an economic disaster, but there are signs things are slowing down.

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Had the International Monetary Fund, Goldman Sachs, the U.K. Treasury, and a whole host of other forecasters been correct, the U.K. economy would be suffering a recession right now thanks to the Brexit vote.

Instead the economy continues to grow, strengthening the hand of those who say the U.K. can prosper outside of the European Union. In fact, Japan’s NHK reports on Monday that the IMF will soon raise its forecast for British growth to about 2 percent from 1.5 percent and say the impact of Brexit is not yet apparent. The EY ITEM Club also said on Monday that a revival in growth abroad and a weaker pound will help the economy to grow 1.8 percent this year.

Shoppers pass along Oxford Street in London, U.K., on Friday, July 8, 2016. U.K. retailers had their worst June in a decade as consumers reined in spending ahead of the country's European Union referendum, according to figures from accounting firm BDO. Photographer: Chris Ratcliffe/Bloomberg

Oxford Street in London.

Photographer: Chris Ratcliffe/Bloomberg

Not all are confident, however, and if the economy does soften then the pendulum may swing back toward those who warn Prime Minister Theresa May not to jeopardize links to Britain’s biggest export market by trying to slash money flowing to the region and labor flowing out of it.

And signs are mounting that the economy’s post-referendum resilience is starting to flag outside of services.

On Friday, manufacturing, construction, industrial production, and house price data all came in under the median predictions of economists surveyed by Bloomberg. On the same day, the National Institute of Economic and Social Research estimated that growth pulled back to 0.5 percent in the first quarter from 0.6 percent in the prior three months.

Meanwhile, the Citigroup surprise index, which compares actual data to what was forecast, last week fell to its lowest level this year. The fading is also captured by the Bloomberg Brexit Barometer.

This week will provide some more insights. Surveys of upcoming indicators suggest while inflation’s acceleration paused in March, another weakening in wage growth means pay isn’t keeping pace with price increases. That will influence household spending, a driver of growth until now.

On the Markets

The pound suffered its first weekly decline against the dollar in a month on the back of the soft data.

Still, investors at Old Mutual Global, Pacific Investment Management, Societe Generale, and Mizuho reckon there is room to make money by selling U.K. gilts. They assume faster inflation will stop the Bank of England from easing monetary policy even as the economy weakens.

“U.K. bonds are one of the best shorts out there,” Mark Nash, the head of global bonds at Old Mutual, told Bloomberg’s Anooja Debnath.

Over in the stock market, Unilever’s announcement that it may end its dual nationality and base itself solely in London or Rotterdam means May’s Brexit strategy could facing either a big endorsement or an early blow, according to Bloomberg’s Robert Hutton and Alex Morales.

Weekend Wrap

Prominent Conservatives backed a call to cap annual net migration at 50,000 people once Britain leaves the EU, increasing the pressure on May to satisfy the euro-skeptic wing of her party by restricting the influx of foreign workers in any Brexit deal. The report by the Leave Means Leave pressure group published Sunday called for the introduction of a system of employment visas with a five-year freeze on unskilled immigration.

Ford Chief Executive Officer Mark Fields told the BBC that the carmaker is “going to be in the U.K. for quite some time,” but that ensuring free trade between the U.K. and the Continent will “be really important.”

The Financial Times quoted French Finance Minister Michel Sapin as saying London will lose euro-denominated trading operations after Brexit. The newspaper also reported Brexit has triggered a “mini-boom” for lawyers, according to the chairman of Baker McKenzie.

The European Commission sees shortages of supply and potential chaos at borders in the event of an uncontrolled Brexit, German newspaper Bild reported.

The EU is considering excluding the U.K. from some trade-deal discussions, the FT said, while the Mail on Sunday reported that diplomats have been told to stop working on environmental issues and refocus on drumming up trade deals. A poll by Lord Ashcroft in the Sunday Telegraph showed most Leave voters believe cutting payments to the EU is more important than ending free movement of labor. Politico cited another poll that suggested a majority of Conservatives want to see migration fall, whatever the circumstances.

The Times reported Gina Miller will join a new group representing those who campaigned for Remain, while the Telegraph said data from the Commonwealth suggested Britain could boost exports to India by more than £2 billion. The European Parliament’s Brexit point person, Guy Verhofstadt, wrote in the Independent that May should be “open” to a plan to help Britons who want to retain EU citizenship after Brexit. City of London Corporation policy chief Mark Boleat told AFP that “on the whole, things are looking rather better.”

And Finally…

The departure of the U.K. from the EU will shift the region’s geographical center to a farmer’s field in the northern German hamlet of Gadheim, according to French geographers cited by the BBC. That’s 70 kilometers south-east of the current midpoint.

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