March 4, 2019

Chart of the Week: Brexit uncertainty reflected in Fathom’s ESI

by Fathom Consulting.

Fathom’s UK Economic Sentiment Indicator fell to 0.2% in January, driven primarily by weaker business confidence, with measures of consumer confidence largely unchanged on the month. Aside from the period immediately following the EU referendum, the latest reading is the weakest since early 2013, when the UK economy was on the verge of a double-dip recession. Continued uncertainty over both the nature and timing of the UK’s departure from the EU has had measurable consequences for economic activity. Based on a statistical model estimated up to 2016 Q2, our analysis suggests the level of UK business investment during the final quarter of last year was some 10% lower than it ought to have been given the evolution of the marginal product of capital, and the real cost of finance. One interpretation is that this shortfall represents the impact of heightened economic uncertainty following the June 2016 vote – and if it does, then it is broadly equivalent to a 300 basis point increase in the risk premium. Except in the event that the UK leaves the EU on 29 March with no deal, there may be little clarity regarding the nature of the UK’s trading relationship with the rest of the union for some years to come.

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