Tony Ward is chief executive of Clayton Euro Risk
One month on from the shock Brexit vote and it seems an appropriate moment to take stock of where we find ourselves in this brave new order.
Some positive noises have been coming from the Bank of England this week. These suggested that British firms have taken Brexit in their stride and there were no signs of a sharp economic downturn. Most companies, the Bank said, were adopting a business-as-usual approach and not cutting back on either investment or hiring. Perhaps more tellingly, the Bank’s regional managers, who monitor on-the-ground activity, said that the housing market has proved more resilient than had been feared. This suggests the majority of companies did not expect to change their capital spending and few planned to alter either their hiring intentions or salaries – albeit the agents cautioned that a third of all businesses expected some negative impact on their recruitment and investment plans over the coming year.
This was followed by more of the same from Mario Draghi, president of the European Central Bank, who played down fears about the wider impact of Brexit as he urged people to take warnings of a severe economic slowdown with a ‘grain of caution’. He said that Europe’s financial markets have ‘weathered’ the uncertainty caused by Britain’s vote to leave the EU, adding that the markets had displayed ‘courage and resilience’.
It was all looking so good until Friday when data from Markit’s Purchasing Managers’ Index (PMI) suggested that Britain’s decision to leave the EU has led to a ‘dramatic deterioration’ in economic activity. The index showed a fall to 47.7 in July, the lowest level since April in 2009. Both manufacturing and service sectors saw a decline in output and orders. Economists quickly started warning that the data was consistent with an ‘imminent recession’ after a flash reading of activity in the manufacturing and services sectors showed a decline in output and new orders, while business expectations recorded their sharpest fall ever.
So, doom and gloom. And yet, and yet…
Many responses to the PMI survey were collected before Theresa May’s appointment as Prime Minister, which has subsequently calmed businesses’ fears. Markit’s chief economist Chris Williamson said: “Some of the later questionnaires coming in said they had seen things improve over the course of the month with the new government being put in place. There are some signs of the political stability coming in.” Moreover, other commentators warned that there had been times in the past during which a slump in PMI turned out to be a false alarm, such as the dotcom bust and in the aftermath of 9/11. Investec’s Chris Hare said: “The key question is whether (the results from the survey) represents a knee-jerk bout of panic that gripped businesses as they responded to the survey, or whether the signal of an impending recession is a genuine one.”
I agree with this and am hoping that the recent PMI data is the worst it can get as we move forward from the Brexit vote. However, I am certain that what we don’t need right now is the sort of negative speculation that I have seen in the press about the UK economy failing and ‘juddering to a halt’. Confidence is key; I don’t think negative rhetoric at this stage is helpful – after all, much of this talk is pure speculation.
We could very easily be guilty of talking ourselves into a recession. And I can’t imagine anyone wants that.