The dog that didn’t bark
The British economy barely broke its stride after the country voted to leave the European Union. This piece of good news poses a dilemma for finance minister Philip Hammond and Bank of England Governor Mark Carney. A quick dose of hefty stimulus becomes harder to justify, yet waiting to see whether things take a turn for the worse is a risky policy.
UK GDP expanded by 0.5 percent in the third quarter, according to data released on Oct. 27. The first official snapshot of how the overall economy performed after the EU referendum shows a slight slowdown from an unusually strong 0.7 percent rate of expansion in the second quarter. Yet it surpassed economists’ expectations and defied the doom-laden predictions that a “leave” vote would tip Britain into recession. Indeed, Britain’s national statistics office said there was little evidence of a pronounced economic impact in the immediate aftermath of the decision.
Strong expansion in the dominant services sector, particularly in consumer-focused industries like film and television, more than compensated for declines in production and construction. This gives Hammond fewer obvious reasons to deliver a big spending boost, while also diminishing the case for Carney to cut policy rates from already-record lows.
The problem is that things may get worse once Britain formally triggers the process of leaving the EU next year. The preliminary GDP reading – which is subject to revisions – gives no details of how business investment fared. This will be crucial in determining how fast the economy grows in the future and the potential for companies to take on new workers. Moreover, consumer spending may be an unreliable driver of growth if inflation picks up as sterling’s rapid slide boosts the price of imports. Rising prices will squeeze households’ spending power. Since they have already reduced their savings ratio, they could be forced to scale back consumption.
The problem for UK policymakers is that if they wait to act until there’s clear evidence of a slowdown, their response may come too late: Hammond currently only has two opportunities each year to tweak the fiscal levers. Giving the UK economy a hand before it’s crying out for help may still be the most prudent option.