The British economy’s solid performance since the EU referendum may start to stall as the implications of Brexit start to sink in, according to investment bank Panmure Gordon.
The continuing stability of UK growth could be defined as a “sugar rush”, analysts at the bank warned in a report released on Thursday, meaning that consumers are carrying on as normal until the real effects of Britain’s decision to leave the EU become clear.
“Brexit worries have failed to take upstage the UK economy since June’s referendum”, the report said, adding that the UK economy has continued to outperform consensus. Household spending has remained resilient, which is likely to remain the case over the next quarter as the stimulus of fiscal and monetary loosening and a devalued exchange rate co-ordinate with accelerating global growth.
However, the analysts said this solid growth could be defined as “roadrunner syndrome”, or “a failure of UK consumers and businesses to comprehend the pitfalls ahead.” It added that “for others it is the fact that Britain’s exit from the EU has not yet taken place”, and “or the Bank of England it is largely the result of swift policy action at the August MPC meeting and the rapid depreciation in the value of Sterling.”
Due to the UK’s stronger-than-expected performance, Panmure Gordon upgrades their 2017 growth forecast from 1.7 percent to 1.8 percent.
However, it added that as Brexit negotiations begin the economy is likely to stall. The report said: “Our base case is that by 2020 trend real output growth will fall from 2.1 percent year-on-year to 1.7 percent year-on-year – consistent with the UK facing a less favourable demographic profile.”
Panmure Gordon’s analysts were more cautious on the prospects for UK equities.
“The post-referendum bounce-back of equity markets has fed off the quadripartite impacts of currency depreciation, commodity price appreciation, the resilience of the UK consumer and the additional risk appetite seen in US equity markets”, the report said.
Turning to sterling, the bank said it believed sterling has seen the worst of its post-Brexit depreciation after dropping 21 percent peak-to-trough.
“However, we still expect a slight weakening of Sterling in Q2 against the backdrop of a recovering Eurozone economy”, it concluded.