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Wind Turns to Clouds in February: Brexit Barometer

Our monthly update on how Brexit is affecting the economy

With the start of U.K.-EU trade talks looming and an ongoing civil war within the Conservative Party over Brexit, the only real bright spot for Prime Minister Theresa May in February was the economy, Bloomberg’s Brexit Barometer shows.

The barometer, which includes data for U.K. growth, labor market, inflation and other key economic indicators, rose to 25.2 in February from a revised 12.2 in January, marking an improvement to “cloudy” conditions after seven months in “windy” territory. 

The increase was largely due to an improving labor market. A reading of employment expectations in the retail trade industry rose to its highest in six months, helped along by a robust employment outlook in manufacturing. Measures of economic activity were higher in general as uncertainty, especially stock market volatility, lessened.

Economist Comment

The gain in the Barometer in February was almost entirely driven by a rise in the employment sub index. That suggests that the pickup in the unemployment rate at the end of last year could be fleeting. Still, the Bank of England will probably want to see the signal from the employment surveys borne out in the official data before sanctioning another rise in interest rates.
—Bloomberg economist Dan Hanson

The barometer is calculated every day with the most up-to-date data available. The monthly average captures the economy’s longer-term trajectory and provides more clues to future direction.

Read more: Bloomberg’s Daily Brexit Barometer

While not included in either the daily or monthly barometer, some more closely watched but lagging indicators released during February revealed a dourer picture. On the negative side: industrial production in December shrank by the most in more than five years, fourth-quarter gross domestic product and January retail sales both came in below forecast and the jobless rate unexpectedly climbed at the end of 2017. 

Wild Ride

The U.K. economy improved in February but remains worse off than before the EU referendum

Source: Bloomberg Economics

Note: Zero represents the long-run average of the barometer.

Among the few economic positives: inflation ticked down in January.

Political Backdrop

February was nearly as tumultuous as January, with a group of more than 60 Conservatives demanding May deliver a bigger split with the European Union. On the other side, at least 10 of their Tory colleagues said they’d back an amendment calling for the U.K. to participate in a customs union with the bloc. Despite managing to avoid a showdown during a meeting of top Cabinet officials late in the month, May then was confronted by a a draft exit deal published by the EU designed to push her toward a more conciliatory stance. 

The barometer is powered by four data feeds curated by Bloomberg Economics that include 22 indicators in all. In February, the measure rose 11 days and fell 9 days, pointing to fluctuating levels of uncertainty in the U.K. stock market and with the pound. More broadly, the barometer has spent seven of the past 16 months in “cloudy” territory, or below the 35 mark, with the remainder spent in “windy” conditions, or below 20. 

The last time the barometer turned negative, or “rainy,” was in July 2016, in the immediate aftermath of the referendum vote.

February’s Most-Read Brexit Stories:

What to Watch in the Coming Weeks:

  • March: Start of U.K.-EU trade negotiations
  • March 22-23: Top summit in Brussels, where national leaders hope to sign off on a post-Brexit transition deal
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