Businesses’ Brexit concerns haven’t stopped us shopping

Business are worried about Brexit, but consumers haven’t got the memo. That’s the state of play from the limited evidence that has emerged since the vote on 23 June. In the short term firms and people can have different views about its impact. But, just as in the long run we are all dead, so in the long run these two views will have to converge. It matters a lot for our future prosperity whether that happens via firms perking up or via customers getting more anxious.

So what do we know so far? In terms of cold, hard economic facts, not much of course – after all, we’re only eight weeks on from the vote. In terms of surveys of confidence and intentions, the overnight effect looked to be universally negative but, while businesses continue to worry, consumers look to have got their mojo back.

For example, having plummeted to a two and a half year low in July, the regular Markit survey covering household views of their own financial position reached a five-month high in August. In contrast, there is no sign of a similar rebound among firms, with the latest information from Bank of England Agents painting a very subdued picture for the coming year (50 per cent think Brexit will reduce their turnover).

More concretely, service sector PMI showed the biggest fall in activity in July since March 2009 (and remember that was the month interest rates first hit 0.5 per cent as it became clear how big the financial crisis was). Together with wider activity surveys for manufacturing and construction, that points to activity levels consistent with a 0.4 per cent quarterly rate of decline of GDP. Yet, as we heard today, consumers carried on shopping in July. We’ll never know whether this was a coping mechanism or a response to the good weather, but the amount spent in retail rose by 1.6 per cent compared to June, well above expectations.

In many ways the fact that consumers are more resilient than businesses is not massively surprising. In the end people’s experience of the economy comes down to what’s going on with their job and with prices in the shops. As of yet, the answer is not very much.

Standard economic theory implies that the sizeable depreciation we’ve seen in sterling should be felt in higher inflation. But it takes time for this to feed through to the high street. Yes imports have become more expensive overnight, but we can expect a lag in domestic prices (with higher production costs for firms who use imported components being passed on over time). The data backs this up, with consumer prices basically unaffected by sterling’s fall to date but factory input prices rising by 4.3 per cent year-on-year in July (compared with a 0.5 per cent fall in the year to June).

On the labour market, businesses are saying pretty consistently that their hiring intentions are lower post-referendum. An August CIPD survey showed a significant fall in the number of employers expecting to expand – particularly in the private sector – and the Bank of England Agents’ reports have found a similar weakening of employment intentions. But the very limited real data we have provide no indication of any concrete change in the labour market as yet, with the claimant count falling marginally by 8,600 in July. Firms are anxious but they aren’t letting people go just yet. The more diffuse impact of reduced hiring takes longer to come through and is less visible to households.

For now, economists and policy makers are definitely siding with anxious businesses rather than chillaxing consumers. The Bank of England has led the policy makers’ response to the Brexit vote so far – bringing out their sledgehammer of lower interest rates and more quantitative easing. But even after taking into account the impact of their own action the Bank is still forecasting slower growth and lower wages. They think people will be earning around £600 less in 2018 than previously expected.

Other forecasters broadly agree. The Treasury’s summary of independent forecasters shows almost everyone expecting significantly lower growth – on average expecting the economy to be £34 billion smaller next year than they previously thought.

In the long run, the impact of Brexit is a supply shock to our productive capacity as a nation. Understanding the full impact of leaving the EU, rather than just the demand implications of inevitable post-vote uncertainty, will take years. We can expect the views of businesses and consumers to evolve as the reality of Brexit slowly unfolds.

But in the meantime, how businesses and consumers respond to each other’s moods matters. Will businesses respond to resilient consumer demand by deciding their pessimism may have been overdone – not least because in the end if people want to buy things you’re going to produce them? Or will consumers wish they had started cutting back sooner when business pessimism starts to manifest itself in the jobs market – you can’t smile if you’re worried about losing your job? As with so much of the Brexit debate, we will have to wait and see.