Fathom’s Economic Sentiment Indicators (ESIs) distil the information contained within numerous surveys into composite measures of underlying sentiment. The UK ESI dropped to -0.2% in August, the lowest since the crisis, and continues the downward trend in sentiment that began last year. The drop was driven by expectations, with the forward-looking components of the ESI performing the worst. Only two of our thirteen components showed improvements from July.
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Before being shut down earlier this month, the British parliament passed a bill intended to prevent a ‘no-deal’ Brexit on 31 October. Despite the recent rhetoric, the possibility of Boris Johnson obtaining a deal with the European Union looks as distant as ever. We anticipate a further extension of at least three months and an election before the end of the year. The uncertainty plaguing both business and household expectations looks set to stay.
This has been clearly reflected in currency markets over the last few months. In early September sterling briefly traded below $1.20, its lowest in three years. Excluding the ‘flash crash’ of October 2016, which was probably to do with an algorithmic mishap as opposed to economic fundamentals, it was the lowest since 1985. Brexit even brought about the most unusual of currency movements — sterling appreciated as the government lost its majority and looked likely to collapse.
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The Bank of England will be closely watching how Brexit feeds through to inflation and the overall health of the economy. There are forces that could move inflation either way. Higher prices for UK consumers — through a weaker pound and higher tariffs on imports from the EU — could warrant an increase in the policy rate. Fathom’s own estimates predict that an orderly ‘no-deal’ Brexit would knock 2% off the level of GDP, which would warrant a rate cut. Therefore, the Bank maintains that interest rates could also go either way. The overwhelming sense though, is that the UK economy would need a boost. On Thursday the Bank said that “uncertainty was in danger of becoming entrenched”, and that interest rate cuts were now more likely.
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