Two months on from the EU referendum, the outlook for the UK economy remains very uncertain.
While we still lack the “hard” data that will give us an accurate picture of how the economy is faring, the decline in consumer and business confidence through July clearly points towards a drop in domestic demand. However, the depreciation of sterling has the potential to counteract this falling sentiment and boost the economy.
While the global economy may still not be in great shape today, world trade is growing more quickly than in 2008Adam Chester
Further declines in recent days have seen the pound fall by around 12 per cent since the EU referendum, and that follows a substantial depreciation in the first half of the year. Taken together, the pound is down about 18 per cent since last November.
This should have a significant economic impact, making our exports more competitive and rival imports less so, while higher import prices would be expected to lift inflation.
A double-edged sword?
It is potentially good news for manufacturers, who tend to be big exporters, although at least some will also see the import costs of their raw materials go up. It should also help some services industries, such as tourism.
From a cost point of view, this is a good year to be taking a holiday in the UK, particularly if you are an American. In contrast, right now is a particularly expensive time for a Brit to holiday abroad.
So are there any signs of these trends in the economic data yet? Well, data for June showed that the UK trade deficit remains substantial. But there were some more positive trends too. In particular, over the past three months’ exports (excluding oil) have grown by 2.5 per cent in real terms.
That might be why manufacturing output also held firm in quarter two. Moreover, exports orders seem to be holding up much better than those from the UK.
Banking on export orders
Lloyds Bank’s July PMI manufacturing survey showed a sharp fall in both activity and overall orders, but also indicated that exports orders continued to increase. Some caution is perhaps warranted though, as the last big sterling depreciation in 2008 did not generate the pick-up in exports that was expected.
But that was at a time when the global economy was in deep recession and demand was very depressed everywhere. While the global economy may still not be in great shape today, world trade is growing more quickly than in 2008, so exporters will be attempting to sell into growing markets.
That gives us grounds to be optimistic that stronger international activity will provide at least a partial offset to any deterioration in the domestic backdrop.
• Adam Chester is head of economics, commercial banking, at Bank of Scotland