Don’t be fooled by positive U.K. data

By Katie Keir | August 18, 2016 | Last updated on December 6, 2023
4 min read

Despite positive economic data this week, a European economist is warning of a possible recession in the U.K. and taking a more bearish view than the BoE.

Earlier this month, the BoE stopped short of forecasting a recession—even as it implemented a rate cut, a QE increase and a funding scheme for banks, following the Brexit vote.

But Peter Westaway, chief economist and head of investment strategy for Vanguard in Europe, tells he’s more pessimistic. “There’s likely to be quite a sharp downturn [through] the rest of the year. We might tip over into a recession in the second half of this year, or maybe early next year.”

The main reason is uncertainty around how the U.K. would leave the EU, and under what terms, says Westaway, who’s based in London. “Under the more extreme versions of [a British exit], we’ll have a big deterioration in our trading relationships,” he explains. “That means that the supply side of the economy would be lower, along with productivity. But, how big that supply shock is [will] depend on whether we have a hard or light Brexit.”

The U.K. isn’t yet seeing any of those effects, he adds. “But what will drive a downturn is uncertainty. If you’re a company and have a big investment project you’re working on, or if you’re thinking about an expansion and hiring, why would you go ahead with that when you could wait until clarity comes along?”

Also, despite the strength of the U.K.’s latest consumer data, households may also hold off on spending or big purchases in the near term (e.g. homes or investments)—the rise in spending was mainly attributed to tourism and seasonal factors.

Positive U.K economic data

The last few weeks have been busy for the U.K. We saw the the introduction of an aggressive stimulus package by the BoE, as well as jobs and consumer spending data.

The results of that data seemed encouraging: retail spending data for July beat analyst estimates (spending rose 1.4%, compared to the predicted 1%), while pre-referendum employment data showed the U.K. jobless rate remained steady at 4.9% leading up to the referendum.

Says Westaway, “As far as how this uncertainty gets resolved, [that] hinges on when and if the U.K. triggers Article 50 [to] set Brexit in motion.” He notes the U.K. can’t leave and alter immigration laws, and still expect to have the same market access and privileges.

The BoE’s latest inflation report forecast the U.K. economy is at or close to recession, and that the inflation rate will return more quickly to the 2% target than previously expected. “[Still], the market response to Brexit has been relatively benign and, politically, the U.K. seems fine,” says Westaway.

But, he warns against making conclusions about the U.K. referendum’s global impact. “It’s much too early to tell. Brexit would be costly, and the factors driving the argument that there could be a downturn are still valid,” he adds.

Closer look at U.K. data

Westaway notes the U.K.’s recent jobs report, which showed a decline in unemployment as the jobless rate held at 4.9%, was backward-looking. “Even in the months running up to the referendum, there was some weakness in the economy,” he adds.

As a recent CIBC report notes, there was a reason British economist and BoE policy hawk Ian McCafferty changed his tune about the need for further stimulus. “Data released thus far don’t paint a picture of an economy insulated from the effects of the Brexit vote. For example, hard data suggests the economy was slowing even before the vote.”

CIBC’s report says the U.K. trade deficit rose to £12.5 billion in June and manufacturing contracted, and that there’s the possibility of further weakness for the sterling.

Also, even though the U.K.’s July consumer spending statistics beat the consensus estimate, that measure is a volatile one, Westaway says. “If you look at some of the soft data instead, it looks like things are going to take a turn for the worse. The [findings in the] BoE’s inflation report were pretty gloomy in terms of hiring and investment intentions being down over the next few months.”

If the decision to leave or stay in the EU takes too long, current uncertainty may also become protracted. “There will definitely be a short-run sharp protraction, but whether the economy bounces back and what the long-term [effect] will be, depends on which version of Brexit we get,” he says.

More exits in the cards?

A painful Brexit could benefit EU cohesion. “If the U.K. chooses to exit and if that has adverse consequences, [countries] may look across the Channel at the mayhem unfolding, and not want to go through the same thing,” says Westaway.

Brexit would only be a global event if it inspires other countries to leave the EU. “If that happens, then we could have a rerun of the sovereign debt crisis, and that was global,” Westaway adds.

CIBC’s report also notes euroskepticism, finding that “a slowdown in the U.K. will be detrimental to exports from the rest of Europe and will weigh on global growth in the short term. However, it would also highlight the uncertainties involved in leaving the union.”

Sentiment toward the EU has been negative in Spain and France. However, “while respondents in France and Spain [have] had a generally unfavourable view of the EU, less than 40% wanted to see some powers returned to the national government,” CIBC’s reprt says, citing a June 2016 PEW Research Centre study.

“That’s in stark contrast to the 65% of respondents in the U.K.” who preferred to depend on their own government, says the report.

Westaway suggests investors monitor the U.K. economy. Longer-term goals shouldn’t be impacted, he says, but markets and businesses will be affected by interest rates and growth challenges in the near term.

Katie Keir headshot

Katie Keir

Katie is special projects editor for and has worked with the team since 2010. In 2012, she was named Best New Journalist by the Canadian Business Media Awards. Reach her at