By Gökhan Kurtaran
London letter, week beginning Oct. 31

- Too early for optimism with GDP growth data

Despite the economy slowdown, the U.K. has grown faster than predicted ahead of the European referendum vote in June. GDP growth in the third quarter of 2016 dropped to 0.5 percent from 0.7 percent in the second quarter, according to data from the Office for National Statistics (ONS). This reflects a stronger than predicted growth of 0.3 percent anticipated by economists. Moreover, the data also beat the latest forecast of the Bank of England monetary policy committee’s projections who expected nearly a 0.1 percent growth rate in the third quarter.

Last week’s data could be interpreted as a relief for U.K. Prime Minister Theresa May and her cabinet as the sharp decline in sterling has recently been the biggest concern among consumers and markets.

Following the growth date release, Chancellor Philip Hammond, who is due to announce his post-referendum budget at the end of next month, said the ONS data shows that the economy is “resilient”, noting that “we are moving into a period of negotiations with the EU and we are determined to get the very best deal for households and businesses.”

However, it might be too early to see the real long-term implications of the Brexit decision and negotiations between U.K. and EU member states. According to the Federation of Small Businesses (FSB), companies still face uncertainty.

"The growth we have seen is, in no small part, due to small businesses’ hard work and resilience. This comes against a backdrop of unavoidable economic uncertainty following the referendum result, coupled with growing domestic challenges. In fact, 62 percent of businesses in our most recent survey cited the domestic economy as a barrier to growth," Mike Cherry, FSB chairman said.

According to some economists, we may only see the real implications of the Brexit on the U.K. economy in 2017.

“The biggest risk for U.K. growth is a sharp slowdown in business investment that could become more pronounced in the coming months, once the U.K. government has triggered Article 50. If the U.K. looks set to lose its access to the single market, then we may see the consumer show signs of stress, which could knock the U.K. economy seriously off course, and potentially plunge us into recession." Kathleen Brooks, research at City Index said.

Another economist, Thomas Laskey, a fund manager at Aberdeen Asset Management also warned, “The outlook for growth is pretty uncertain. Brexit has the potential to be extremely costly to the U.K. and the country could be poorer as a result.”

In the long run, risk still remains particularly if U.K.-based financial institutions continue to have a negative outlook which may cause some to decide to shift their businesses out of the country.

The pound has fallen by 18 percent against the dollar since the referendum, and last week has briefly hit a new six-year low against the euro. This could result in higher prices from the weaker pound and consequently making imports more expensive. This has already manifested in the recent decision taken by Apple to increase U.K. prices by hundreds of pound based on a weak pound.

Last week’s leaked audio of Goldman Sachs’ talks of May before the referendum shows that the PM was concerned that foreign companies would leave the country in the event of a leave vote.  

As per the PM’s slogan, “Brexit means Brexit”, but markets are looking forward to receiving more hints about May’s draft plan, or at least some concrete information to evaluate on how to move forward.

However, talks will not be easy between the EU and U.K. and the EU-Canada trade deal, signed this weekend following seven years of negotiations clearly proves that.  But according to EU Commission President Jean-Claude Juncker, the trade deal with Canada will have no impact on negotiations between the European Union and Britain.



31 Oct,2016