The reaction from Philip Hammond spoke volumes. Yes, the second lord of the Treasury was pleased that UK growth in the quarter leading up to the Brexit referendum had been stronger at 0.6% than anybody had been expecting. No chancellor looks a gift horse in the mouth, and this gift was unexpectedly generous.
Hammond, however, knows full well that this was likely to be the best set of GDP data for some time. When he talked about a “period of adjustment”, what he meant was that the economy is going to cool – perhaps abruptly – following the decision to leave the EU.
Indeed, it took only 90 minutes for the growth figures to be put into perspective. That was how long it took for the next health check of the economy to be published. The CBI’s survey of retail spending canvassed opinion after the referendum and, perhaps unsurprisingly, found consumers were reluctant to part with their cash.
The City wasn’t fooled by the GDP data. A brief rise in the pound quickly went into reverse on the assumption, almost certainly correct, that the welcome strength of the economy going into Brexit will have zero impact on decisions taken by the Bank of England and the Treasury over the coming months. Policymakers will treat the second quarter growth numbers as a historical curiosity, which is really what they are, given that in years to come Britain’s history may be divided into the BB and AB epochs – before Brexit and after Brexit.
Certain aspects of the Office for National Statistics release provide glimmers of hope that the economic fallout from Brexit might be less pronounced than feared. Industry put on its best performance in almost two decades during the second quarter and now has the added advantage of a cheaper pound to make exports more competitive.
Joe Grice, the ONS’s chief economist, said there was no real evidence of Brexit uncertainty affecting businesses in the second quarter.
On the other hand, there are clearly reasons to be cautious. Growth was concentrated in the first month of the quarter, April, before it fell back in May. The ONS relies on forecasts to assess what was happening in June and believes the economy was flat. That suggests there was little momentum when the referendum was held.
The Brexit result was unexpected and has, judging by the surveys since, affected the outlook for both the services and manufacturing sectors. Construction was the one sector that was already struggling in the buildup to the vote and is likely to face an even tougher winter than the rest of the economy.
Growth is going to slow down markedly from now on. The length and depth of that slowdown will depend on how quickly businesses regain their equilibrium. The Bank of England knows that, which is why a big package of measures designed to boost confidence will be announced next week.
