Uncertainty to weigh on U.K economic outlook, growth likely to accelerate 0.4 pct q/q in Q3

U.K’s economic data, since the central bank’s multi-faceted policy easing in early August, have been examined closely on the degree to which they bear the view of an economic slowdown driven by uncertainty post the EU referendum, noted Lloyds Bank. The economic activity trends in the U.K. have remained quite resilient, more than anticipated.

After a severe rebound in August from sharp post Brexit declines witnessed in July, September’s PMIs improved further. The composite throughout manufacturing, services and construction reached its most solid level since January 2016. But while the official ‘hard’ economic data in July were overall strong, industrial output in August contracted. It came in below the economists’ projections.

Recent indicators, when taken together, imply the likelihood that the third quarter economy growth might have accelerated as much as 0.4 percent sequentially, quite more than the central bank’s projection mentioned in the August Inflation Report, according to Lloyds Bank.

The fall in the uncertainty metrics since their peak in July has also been telling, with reading of September moderating further from the prior month. At the face value, it might indicate towards a more modest slowdown in growth than would have been the case had the level in July been sustained, added Lloyds Bank.

Private investment is likely to mostly weigh in on the U.K. economic growth. Thus the diminished uncertainty might imply a more resilient outcome. The available surveys of investment intentions from BCC, CBI and the Bank of England’s Agents have weakened further. In the meantime, the first indications of the UK government’s preferred timetable for the exit from EU highlight the risk of economic discontinuity, stated Lloyds Bank.

Overall, while just a slight slowdown from the second quarter’s growth of 0.7 percent is in prospect for the third quarter, the slowdown further ahead might be slightly more drawn as a revival of uncertainty follows the activation of Article 50 by the UK government’s March-end 2017 deadline, said Lloyds Bank.

In the meantime, the softness in GBP is expected to weigh on the nation’s real purchasing power as increased import costs push inflation up. With the depreciation reaching 16 percent in effective terms since the Brexit and 22 percent since the peak of mid-2015, consumer spending is expected to experience pressure, even if currency weakness would also help stimulate net exports. The possibility of easing of fiscal austerity might be an additional counteract, added Lloyds Bank.