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Slower growth, soaring stocks and the plunging pound. Measuring the impact of the U.K.’s 2016 decision to leave the EU in charts
By David Hodari, Jason French and Pat Minczeski
Published June 22, 2018
Stunted Growth
So far Brexit hasn’t been the economic disaster some predicted, but that’s partly because the global economy has been so strong. The U.K., however, began its last year in the European Union on course to grow more slowly than any other Group of Seven economy. The U.K. has traditionally grown at a faster rate than the eurozone, but growth has been weaker for the past five quarters.
Taking a Pounding
Investors view the British pound as a sign of how the U.K. is faring in its exit from the EU after more than 40 years of membership. Sterling plunged in the aftermath of the vote two years ago and remains at a historically low level against the dollar, though some of that fall more recently is related to the dollar’s strength against most currencies. The pound’s consistent weakness versus the euro, however, is a clearer sign that markets remain wary of Brexit’s final outcome as talks between the U.K. and the EU drag on before the official exit, scheduled for March 29, 2019.
Stocks Full
U.K. stocks have performed strongly in the two years since the Brexit vote, but much of that is down to the fall in the pound. The FTSE 100 and FTSE 250 hit record highs in 2018. But that’s not because the U.K economy is doing well. It’s because around 70% of FTSE 100 and more than 50% of FTSE 250 company revenues are generated overseas. That means those earnings in other currencies are worth more when translated back into pounds, boosting earnings. In dollar terms, the FTSE has lagged its peers, rising only 20% since before the Brexit vote, while the Stoxx Europe 600 is up 23% and the S&P 500 is up 35%.
Stuck at Home
Sectors that earn money abroad, such as mining, have benefited from resilient economic growth in China, the U.S. and elsewhere. Meanwhile, investors have punished sectors that rely on U.K. domestic spending, such as retailers and utilities.
Wage Squeeze
Inflation has risen since the Brexit vote, with the weaker pound making imports of food and energy more expensive. Consumer-price inflation accelerated to its highest rate in nearly six years last year, and has remained steady since.
These price increases have eroded the value of wages. The unemployment rate in Britain hit a 43-year low in June, with employment at a record high in the same month, but with wages weak, Britons have at times been earning less when adjusting for inflation.
Out of Pocket
Consumers’ decreased spending power has weighed on retail sales, one of the key drivers of economic growth. While U.K. manufacturing seemed initially to benefit from the pound’s plunge, which made the country’s goods more competitive on the global stage, that boost hasn’t lasted. U.K. factory output dropped in April at its steepest monthly pace since 2012, in a signal that weak economic data released in the first quarter of 2018 had spread to the second quarter.
Still-Low Rates
The Bank of England responded to the Brexit vote by cutting rates as an emergency measure to support the economy. Rising inflation has forced it to reverse course, and the BOE returned rates to the same level as before the Brexit vote in November 2017. Another rate increase could come later this year.
Gilt Complex
In the aftermath of the Brexit vote, some predicted U.K. borrowing costs would zoom higher as foreign investors turned tail, no longer willing to finance the U.K. government’s substantial borrowing needs. So far, that hasn’t materialized. Yields on U.K. government bonds, known as gilts, have stayed low.
Wall Street Journal
By David Hodari, Jason French and Pat Minczeski
Published June 22, 2018
Stunted Growth
So far Brexit hasn’t been the economic disaster some predicted, but that’s partly because the global economy has been so strong. The U.K., however, began its last year in the European Union on course to grow more slowly than any other Group of Seven economy. The U.K. has traditionally grown at a faster rate than the eurozone, but growth has been weaker for the past five quarters.
Taking a Pounding
Investors view the British pound as a sign of how the U.K. is faring in its exit from the EU after more than 40 years of membership. Sterling plunged in the aftermath of the vote two years ago and remains at a historically low level against the dollar, though some of that fall more recently is related to the dollar’s strength against most currencies. The pound’s consistent weakness versus the euro, however, is a clearer sign that markets remain wary of Brexit’s final outcome as talks between the U.K. and the EU drag on before the official exit, scheduled for March 29, 2019.
Stocks Full
U.K. stocks have performed strongly in the two years since the Brexit vote, but much of that is down to the fall in the pound. The FTSE 100 and FTSE 250 hit record highs in 2018. But that’s not because the U.K economy is doing well. It’s because around 70% of FTSE 100 and more than 50% of FTSE 250 company revenues are generated overseas. That means those earnings in other currencies are worth more when translated back into pounds, boosting earnings. In dollar terms, the FTSE has lagged its peers, rising only 20% since before the Brexit vote, while the Stoxx Europe 600 is up 23% and the S&P 500 is up 35%.
Stuck at Home
Sectors that earn money abroad, such as mining, have benefited from resilient economic growth in China, the U.S. and elsewhere. Meanwhile, investors have punished sectors that rely on U.K. domestic spending, such as retailers and utilities.
Wage Squeeze
Inflation has risen since the Brexit vote, with the weaker pound making imports of food and energy more expensive. Consumer-price inflation accelerated to its highest rate in nearly six years last year, and has remained steady since.
These price increases have eroded the value of wages. The unemployment rate in Britain hit a 43-year low in June, with employment at a record high in the same month, but with wages weak, Britons have at times been earning less when adjusting for inflation.
Out of Pocket
Consumers’ decreased spending power has weighed on retail sales, one of the key drivers of economic growth. While U.K. manufacturing seemed initially to benefit from the pound’s plunge, which made the country’s goods more competitive on the global stage, that boost hasn’t lasted. U.K. factory output dropped in April at its steepest monthly pace since 2012, in a signal that weak economic data released in the first quarter of 2018 had spread to the second quarter.
Still-Low Rates
The Bank of England responded to the Brexit vote by cutting rates as an emergency measure to support the economy. Rising inflation has forced it to reverse course, and the BOE returned rates to the same level as before the Brexit vote in November 2017. Another rate increase could come later this year.
Gilt Complex
In the aftermath of the Brexit vote, some predicted U.K. borrowing costs would zoom higher as foreign investors turned tail, no longer willing to finance the U.K. government’s substantial borrowing needs. So far, that hasn’t materialized. Yields on U.K. government bonds, known as gilts, have stayed low.
Wall Street Journal