There is one overriding question facing the UK economy: how bad is the Brexit hit? It follows that the overriding thing to look for this week will be any evidence that gives us a feeling for the answer.
There will be a slew of information and the trick will be to distinguish what is actually new and what is more the immediate pre-Brexit situation – remembering, though, that the pre-Brexit state is the base on which future developments stand.
As far as the base is concerned, we get second quarter GDP figures for the UK on Wednesday. There is a wide spread of views as to how strong these will be, with the top end suggesting growth will be 0.6 per cent or more, and bottom end 0.3 per cent or less. The optimists think that growth was continuing strongly through the April/June quarter, while the pessimists expect that Brexit fears were already hitting confidence and hence activity.
We’ll see. But the important thing to note is that, as always, the first estimate of GDP is almost invariably revised, sometimes for several years afterwards. So beware setting too much store by it.
Among the more forward-looking indicators there will be numbers from the Confederation of British Industry on Monday for industrial trends, and on Wednesday for retail sales, the so-called ‘distributive trades survey’. Taken together, both will give rather a good feeling for the mood of consumers. This matters because consumption is nearly 70 per cent of the British economy; if people keep buying, the economy keeps growing, and vice-versa.
The only caveat is that both surveys are about what people say and think, not what they actually do. When you get a big shock to the economy it is better to go by what people do. As we have seen, people do not always tell the truth to pollsters. There will also be new consumer confidence figures out on Friday, and the same caution applies here.
One other indicator this week that will give us a feeling for what is happening will be mortgage approvals. If people are still moving home, or planning to do so, then that too suggests confidence is alright. Another sign of what people do, not what they say.
The second set of things to look for will be what is happening to the world outside Britain. We have become particularly myopic for, obvious reasons, but the general truth remains that if the world economy goes on growing it is quite hard for any individual country to have a recession and if the world economy tanks it is quite hard to avoid one.
We get second quarter GDP for the US and the Eurozone, which again gives a base for the situation before Brexit. But in this case, these are a better guide to the future because there is no evidence that confidence outside the UK has taken a hit. (The dreadful purchasing managers’ indices for the UK, published last Friday, contrasted with positive numbers for the US and Eurozone.)
Third, US house prices. These are really interesting because they tell us about momentum there. On Tuesday we get the Case-Schiller index, a composite indicator for what is happening across the nation. Have dysfunctional politics led to a dysfunctional housing market? Actually the evidence seems to be quite the reverse, and expect that to be confirmed by these numbers.
Fourth, I’m interested in the upcoming stress test for Italian banks. This may seem arcane, but the weakness of the European banking system is the key threat to the Eurozone economy; while many banks there are weak, it is Italian banks that are the weakest.
Finally, something more general. It is becoming clear that the key issue facing the UK will be whether Brexit is ‘hard’ or ‘soft’. Do we make a substantial break from Europe, or so we – in economic terms – carry on pretty much as before?
There is a good paper just out from the Adam Smith Institute arguing for the soft version, the theme being that membership of the European Economic Area (like Norway) could be constructed to give substantial additional freedom for policy-making while de-risking the threat to the economy. Given that the new government has to find a way of satisfying the 48 per cent as well as the 52 per cent, this does rather make sense. So let’s see what sort of resonance this report gets.
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