Sunday, July 07, 2019
Brexit bluster comes home to roost as growth hits the buffers
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

Sometimes a figure comes out which really pulls you up short. Just such a figure was published a few days ago. The purchasing managers’ index (PMI) for Britain’s construction sector slumped last month. Already weak at 48.6 in May (levels below 50 signal a decline in output), it plunged to 43.1 last month. Not only was this exceptionally weak, but it represented the biggest fall in output since April 2009, when the economy was still mired in the 2008-9 recession, the worst since the Second World War.

The details of what IHS Markit,, which compiles the survey, described as “an abrupt loss of momentum” for construction were as bad as the headline figure. As Tim Moore, an associate director of IHS Markit put it: “The latest survey reveals weakness across the board for the UK construction sector, with house building, commercial work and civil engineering activity all falling sharply in June. Delays to new projects in response to deepening political and economic uncertainty were the main reasons cited by construction companies for the fastest drop in total construction output since April 2009.”

Construction is, of course, only one part of the economy and, while as noted last week it has recovered well since the crisis, it only accounts for about 6% of gross domestic product. Isolated weakness in construction does not mean trouble for the whole economy.

Except that the construction PMI was accompanied by weakness in the surveys for other parts of the economy. The manufacturing PMI fell to 48 last month, from 49.4 in May. It had been expected to bounce back after the stockpiling boost in the first three months of the year.

The service sector PMI, meanwhile, dropped from 51 to 50.2, with “subdued activity often attributed to sluggish domestic economic conditions and greater risk aversion among clients in response to ongoing Brexit uncertainty”. The “composite” PMI, a weighted average of all three sectors, dropped to 49.2, signalling the first drop in private sector activity since immediately after the referendum.

These PMIs, suggesting the lights are going out all over the economy, are not isolated reading. The CBI’s growth indicator, published last weekend, show3ed the fastest fall in private sector activity since 2012.

The British Chambers of Commerce quarterly survey for the second quarter, also last week, showed a very weak manufacturing sector and a slight uptick for services, but pointed out that “the uptick in activity was not enough to outweigh the significant drop in these indicators in the first quarter”.

We will see this week if the weakness in the surveys is matched by the official data, with a string of releases, including construction, production, services and monthly GDP for May. Even if GDP showed a monthly bounce in May, the arithmetic for the second quarter, and avoiding a quarterly drop in GDP, is very challenging.

The significance of the surveys, meanwhile, was that they showed that we have seen a weakening through the quarter, and a downward trend that accelerated last month.

It is easy to see why this is. Three years ago Britain voted for Brexit, even though its advocates had not serious idea or plan on how to deliver it. Boris Johnson, who was instrumental in securing a vote to leave, had no clue then about how to achieve Brexit and, three years on is not providing much of a clue now. Many “Back Boris” supporters, I think, must be similarly clueless.

Jeremy Hunt, who started off as the sensible one in the leadership debate, has been obliged to join Johnson in the mosh pit of extreme silliness, being prepared to embrace a no-deal Brexit even if it as almost as bad as the financial crisis of 2008.
Apparently eyecatching announcements, such as the one revealed to this newspaper last weekend, of bringing in the former Canadian prime minister Stephen Harper to negotiate a “Canada-plus” trade deal with the EU cannot get over the fact that (a) prime ministers do not do trade negotiations and (b) you first have to have a withdrawal agreement passed by parliament.

For every bluster in the Tory leadership race, there is counter bluster. For every unicorn there is a rival one. When a Tory chancellor has to warn the candidates to be the next Tory prime minister to rein in the ridiculousness of their tax and spending plans you know we have reached peak irresponsibility.

There is only so much you can throw at an economy without doing serious damage. We have moved in the space of a few months from the sensible position of leaving the EU under a carefully-negotiated withdrawal agreement and then entering trade talks during a transition period, to one in which pretty much anything could happen, most of it bad. The blame for missing the March 29 Brexit date, and for the situation we find ourselves in, rests solely with the Brexit hardliners, inside and outside parliament. The chickens have come home to roost.

I hear a lot of nonsense talked about this. Some people are daft enough to think that business surveys are biased in favour of a particular result. They are not. IHS Markit, which produces the PMIs, has no political axe to grind but produces its surveys as a tool for business, the financial markets, governments and central banks. The CBI has been producing surveys of its members since the 1950s and was careful last weekend to set the rather alarming verdict of its latest growth indicator in context.

Boris Johnson’s commitment to leaving the EU on October 31 – a commitment on which he is almost sure to fail – is praised by some of his more slavish followers as promising an end to the uncertainty.

It does nothing of the sort, of course. All it promises is another four months of uncertainty, as people and businesses wonder whether he will take us over the cliff-edge of a no-deal Brexit, or whether parliament will prevent it, possibly by forcing a general election, and the new round of uncertainty that would provoke.

A no-deal Brexit would, of course, not mark the end of uncertainty but the start of a more intense phase of it. Beyond the short-term disruption and the very real prospect of long-term damage, Britain’s future trading relationship with our biggest trading partner would be up in the air, and probably stay there for some time.

The other bit of nonsense I sometimes hear is that there is nothing specific to Britain about the current economic situation. The global economy, plainly, is suffering from the fact that there is a protectionist in the White House and his tariff wars, now directed at Scotch whisky, are hitting world trade. Successful exporting nations in Europe, notably Germany, are suffering.

Europe, however, is holding up far better than Britain, according to the purchasing managers’ surveys. The eurozone construction PMI stood at 50.8 last month, nearly eight points above its UK equivalent, and consistent with modest growth. The eurozone composite PMI, covering all sectors, is at 52.2, compared with the UK’s 49.2. Germany’s composite PMI is 52.6. The difference is Brexit.

How do we regain our composure? You have to hope that whoever wins the Tory leadership contest is better in government than they have been in campaigning for it. You do not have to be Brenda from Bristol to hope that a general election can be avoided. But,. To coin a phrase, it’s the hope that kills you.