First in July, consumer and especially business sentiment indicators took the biggest dive ever before seen, then in August they made a full comeback! (Chart 1).

Will Brexit end up being a non-event for the UK economy? We don't think so, and for several reasons...

First of all, an indicator like the PMI (Purchasing Managers Index) is a diffusion index[1]: even if answers veer just slightly from positive to negative, you can see a big change in the index level.

Secondly, the uncertainties surrounding the conditions of Brexit and its impact on the economy are nowhere near resolved: fiscal policy won't be known before the year is out, plus Article 50, which triggers negotiations with the EU, will not be invoked until next year.

So, while on the surface the economy currently appears relatively unaffected by the Leave vote, the lack of medium-term visibility may give households and businesses alike reason to postpone their investment decisions. Furthermore, if companies decide to wait before hiring, the trend in employment and unemployment could have an adverse impact on consumption.

That’s why we are playing it safe: growth may be expected to come out around 1.7% in 2016, but there's no guarantee it won't fall below 1% in 2017. The persistence of uncertainty is plain to see in the exceptional variance of Bloomberg consensus forecasts for 2017 (chart 2)!



[1] A diffusion index is computed using a survey of businesses or households, asked to indicate whether a given component of their activity has improved, remained stable or deteriorated compared to the previous month. Next, the producers of the survey differentiate between (+) and (-) opinions. Finally, they process the results so that they range between 0 and 100, with 50 serving as the line between contraction and expansion (>50).

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