Three months on from the surprise Brexit vote, fears of Armageddon have receded as encouraging news on the UK economy helps to keep nerves in check.
Consumers – many of whom voted to leave the EU – have been spending over the summer, tourists have benefited from weaker sterling and businesses are getting on with the task in hand as the UK government grapples with the complexities of initiating the Brexit process.
For all the positive signs, it’s far too early to assume Brexit will be plain sailing, says Andrew Burrell, Head of Economics & Forecasting, EMEA at JLL. He outlines how the situation has changed over the summer and what it means for the real estate industry.
What is the data telling us?
Over the summer, high street activity was unexpectedly vigorous. Admittedly, this was helped by UK Olympic success, good weather, buoyant tourism and weak sterling but it provides solid evidence that consumers are emerging unbowed from the Brexit trauma.
Other news has been more unexpected, notably a robust rebound in corporate sentiment. Most business opposed EU exit and confidence measures crashed during July. Given the long-time horizons and risk-aversion of firms and the lack of progress on a political settlement, no revival was expected over the holiday period. The reality has been to the contrary, with a number of high profile surveys reporting sharply rising business optimism in August.
How do the figures influence the short-term outlook?
It is early days and unwise to make a snap judgment on the basis of often-volatile monthly data, especially in August. These figures do provide reassurance that 2016 is not a rerun of the 2008 crash, and that UK recession looks a remote prospect. But we should also be cautious in dismissing concerns about Brexit’s economic impact as “scaremongering” as some Leavers have hinted.
What are the key issues weighing on corporates?
It is important to remember that the UK has not left the EU yet. Even if sentiment holds, future investment and hiring decisions will be under intense scrutiny as firms plan for a very different trading environment outside the EU. With Article 50 in limbo until next year, not much will be known about this in the next few months. Moreover, resolution of the biggest issues – single market access, labor mobility, passporting – could be several years away. This uncertainty is unhelpful for long-term planning.
Unlike politicians, businesses cannot sit on their hands and will have to anticipate the changes that Brexit could bring. This is why however encouraging the short-term signs on demand, it is vital that political decision makers clarify their desired options as soon as possible. If not, businesses may respond by scaling back and the post-Brexit bounce will be very short-lived.
How is the UK retail sector faring?
Consumer sentiment – and consumer spending – have remained buoyant over the summer, driven by sporting success and sunny weather during the school holidays, along with the boost from strong tourism as well as more fundamental drivers such as low interest rates, strong employment trends and rising real incomes. Not all of these can be relied on to last. Also, tumbling sterling, while good news for tourists and overseas investors, means higher import prices and inflation rates, weakening domestic consumers’ purchasing power next year.
What are the longer term consequences for the UK economy?
We remain relatively upbeat about the economic consequences of the UK vote. But we also believe that there are many decisions still to be made that will be critical to the performance of the economy and its real estate markets, shaping location and investment opportunities into the next decade. For this reason, it is going to take much longer than two months to form a judgment.