Patterns in Consumption, Investment Slow UK Growth

The negative impact of so-called “Brexit uncertainty” on the UK economy since the vote to leave last summer has been “surprisingly small”, according to a new analysis from bankers at Bank of America Merrill Lynch.

In the year and a half since the UK elected to leave the EU, the British economy has slowed very visibly. Much of that slowdown has often been attributed to “Brexit uncertainty”—effectively the idea that businesses and individuals are delaying major economic decisions until they have some more clarity about what life outside the bloc is actually going to look like, Business Insider reported.

BAML’s European economics team, led by Gilles Moec, doesn’t buy that suggestion, stating: “We do not think Brexit uncertainty has had a particularly large effect on consumption and investment,” in a note titled “How Brexit stole Christmas”.

“And if there has not been a large negative effect of uncertainty, resolving uncertainty probably won’t have a large positive effect either.”

Basically, the team argues, Brexit may be having an impact on the British economy, but it is not due to any so-called “uncertainty”. First, they point to patterns in consumption to prove that point.

“A standard consumption function can explain consumption growth over the past year without taking account of uncertainty effects. As our analysis of consumer confidence suggests, that may be because credit conditions loosened sharply last year. Forbes (2016) shows that uncertainty impacts on consumer spending usually come via tighter credit conditions. Without the latter there are much smaller effects from uncertainty.”

BAML’s report notes that: “Business investment growth slowed from about 4.5% in 2015 to 2.2% by 3Q 2017. That is no doubt down to Brexit, but still suggests investment has been holding up relatively well: not much investment spending may have been delayed yet.”

Citing a report from the bank’s chief economist Ethan Harris, it adds that “uncertainty may have smaller effects on growth than the past in part because ‘what doesn’t kill you makes you stronger’.”

Rather than being hit by uncertainty per se, the UK’s economy, which is expected to grow at around 1.5% in 2017, is facing two “shocks.” These are, BAML believes, a combination of weak productivity and potential growth, and Brexit as a whole.

Productivity has been a long running issue for Britain, and has effectively not grown since the financial crisis, leading Bank of England Governor Mark Carney to talk of a “lost decade” for the economy late in 2016.