What to make of this week's mixed economic data

This week, during the Conservative Party Conference, we have had a flurry of economic data; market data reacting to events in the conference itself, and more backward-looking data giving us clues about how the economy has been weathering the uncertainties after the vote to leave the EU on 23^rd June.

We have had encouraging Purchasing Managers' Index numbers for construction, manufacturing and for services in the UK, for September. All three now record survey values greater than 50, which indicates that each sector is expanding, not contracting.

For manufacturing, this is a sign that the fall in Sterling after 23rd June may have started to do its work, injecting a short-term stimulus into the competitiveness of our manufacturing exports. The construction data is more encouraging. The biggest concern economists have about the outlook post-referendum is that businesses may hold off making large scale investment decisions until uncertainty about the future shape of our relationship with the EU is resolved. Construction activity tends to be linked to large projects like this, so it’s encouraging that there has been no sustained fall off in this sector. The service sector data show that the bounceback after the referendum plunge has been sustained, but the survey number of 52.6 is still very low compared to the last few years, a period when growth was anything but stellar.

Does this mean that Treasury and other forecasts of post-Brexit doom were wrong? Not really. For sure, some of the direst possibilities worried about, that the vote to Leave would trigger a seizing up of financial markets, for example, have not come about. But this doesn’t mean it was wrong to warn about those possibilities. Throwing a six with a dice doesn’t invalidate being warned that you might throw a one. And remember, we have not yet entered the period where the locking of horns with the EU takes centre stage. The services survey numbers in particular will probably reinforce forecasters like the Bank of England in their view that growth will be much subdued over the next few quarters.

Markets have been reacting to more recent events at the Tory conference. Sterling fell after Theresa May’s speech was previewed in the press. It’s now about $1.27-$1.28, at levels not seen since the mid 1980s.

That fall we can take as a judgement about the riskiness and profitability of holding UK assets in the view of market investors. The speech was taken as suggesting that it was more likely the UK would wind up no longer a member of the Single Market at the end of the Article 50 process, since the May government is comfortable with the fall back position, should negotiations with the EU not yield any bespoke deal, of leaving the EU customs union and establishing our own relations under World Trade Organisation Rules. Although some Brexiteers positively want this, investors clearly think it a bad idea, and don’t like the uncertainty that would come with a protracted, post-Article 50 negotiation.

Share indices like the FTSE100 rose at the same time. This doesn’t, as some Brexiteers cheered, confound the sceptics. On the contrary. The gloom felt by investors about the UK, which sent Sterling down, automatically boosts the Sterling earnings of FTSE100 companies which have foreign holdings and foreign earnings. Dollar earnings brought into the UK and potentially passed on to UK shareholders as dividends, for example, would now translate, at the lower exchange rate, into more pounds. Indices that are more UK-focused have done less well.

The consensus amongst forecasters is that things may not be as bad in the near-term as was feared if there were a vote to leave on 23^rd June. But typical forecasts—like the new IMF foreast released on Tuesday this week—are still marked down substantially from those that assumed a vote to Remain, and these data won't do much to change that. We have learned nothing that should cause us to deviate from the views about the negative long term consequences of Brexit—on account of their diminuition of trade, migration and capital flows—except that it’s now clearer that the UK is more likely to end up with an outcome at the worse end of the spectrum of Brexit options than we might have hoped for originally.