Another day, another piece of news that suggests the economy is coping with the result of the Brexit vote much better than expected. The latest health check of manufacturing suggests that the record plunge suffered in July was a kneejerk response to the result of the referendum.
All the lost ground was made up in August – and then some. The closely watched Markit/Cips report recorded the joint biggest monthly increase in industry’s performance in the 25-year history of the purchasing managers’ index (PMI), taking it to its highest level since last October.
A couple of words of caution are in order. Sentiment is clearly volatile and, as Lee Hopley of the EEF pointed out, it is possible that an overshoot downwards has been followed by an overshoot upwards. What’s more, manufacturing accounts for only one-tenth of the economy’s output, so a more complete picture of how the economy is faring in these early post-Brexit-vote days will only emerge when the services sector PMI is released on Monday.
Even so, a number of tentative conclusions can be drawn. The first is that manufacturers are being helped by the fall in the value of the pound, which is making UK goods more competitive on global markets. Although there is evidence that the fall in the value of sterling is pushing up manufacturers’ costs, movements in the currency market since 23 June have been broadly positive, since they have supported activity and will help rebalance the economy.
The second conclusion is that policy decisions have made a difference.Theresa May’s swift coronation and the stimulus provided by the Bank of England have made manufacturers more hopeful that they can not just survive but thrive after the referendum.
Finally, while it is still early days and companies are still mulling over big hiring and investment decisions, predictions made ahead of the referendum that the economy would be plunged into an immediate recession by a vote to leave look wide of the mark.
Indeed, most of those who did forecast instant dire consequences are already retreating to their fallback position: that Brexit will be a slow burn, with the impact only felt over time. That seems sensible. It is still quite possible that the economy will slow in the second half of 2016, but there has been scant evidence so far to suggest that it is spiralling into the abyss.