Warnings of British economic downturn piling up

LONDON – The warnings are piling up — Britain’s decision to leave the European Union appears to be already hitting the economy.

Following the initial market jolts that have, among other things, seen the pound slide to 31-year lows against the dollar, the wider economy seems to be feeling the shockwaves from the vote to leave the 28-country bloc.

On Friday, market research firm GfK found that consumer confidence took a dive in the wake of the June 23 decision to leave the EU. In a one-off survey to gauge the impact of the referendum result, it said its core index of consumer confidence dropped by 8 points to minus 9 in July, its lowest level since December 2013.

The decline, which was the sharpest in 21 years, is important as consumer confidence is fundamental for household spending, a key ingredient of the British economy.

GfK found that all of the key measures used to calculate the index, including perceptions of individuals’ financial situation or their propensity to make purchases, have fallen.

“During this period of uncertainty, we’ve seen a very significant drop in confidence, as is clear from the fact that every one of our key measures has fallen, with the biggest decrease occurring in the outlook for the general economic situation in the next 12 months,” Joe Staton, head of market dynamics at GfK said.

The online survey of 2,002 respondents, which was conducted between June 30 and July 5, shows that sentiment has sunk among both those who voted to remain in the EU and those who voted to leave. The measure for so-called “remainers” was minus 13, while “leavers” were slightly more optimistic at minus 5. The referendum saw 52 per cent voting to leave the EU.

The survey backs the view from Bank of England Governor Mark Carney that the negative economic effects he warned about in the run-up to the referendum are “crystallizing.”

Analysts are warning that further declines in consumer confidence are likely and that the British economy may be heading toward an outright recession.

Paul Hollingsworth, U.K. economist at Capital Economics, said GfK’s survey will reinforce fears that consumers “will pull back on spending as a result of the vote to leave the EU.”

Though he noted that the survey was conducted the week after the outcome of the vote, when political uncertainty was at its highest, he said “a further deterioration ahead seems probable” given that employment growth is likely to slow and a rise in inflation caused by the pound’s fall will erode households’ spending power.

Other negative effects are widely expected to materialize over the coming weeks, including a drop in business investment as firms assess the consequences of the vote, particularly whether Britain will still have access to the EU’s single market.

In a report Friday, Moody’s said Britain’s economic outlook has “significantly weakened” after the vote to leave the EU. The ratings agency slashed its growth forecasts to 1.5 per cent in 2016 and 1.2 per cent in 2017, compared with previous estimates of 1.8 per cent and 2.1 per cent.

“The uncertainty around the future of the economy outside the common market would dampen business investment and consumer spending, as investors hold back on hiring and long-term investments and consumers postpone large spending decisions,” Moody’s said.

In addition, Moody’s said the country’s status as one of the largest recipients of foreign direct investment in Europe “is also likely to be damaged by the decision to leave the EU.”

Moody’s concedes that the pound’s fall will limit some of the damage, as it should help exporters. The pound, for example, is down around 10 per cent against the euro since the referendum. One euro is now worth around 0.86 pound.

However, it’s unclear how big those benefits might be given the uncertainty and the fact that many imported costs, such as energy, will rise as a result of the pound’s fall.

Most economists expect the Bank of England to look to stimulate the British economy at next week’s policy meeting. Some expect the central bank to reduce its benchmark interest rate to a new record low from 0.5 per cent, where it has been since March 2009.