UK Economy Can't Shrug Off Brexit Forever

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at 2016.10.27
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UK Economy Can't Shrug Off Brexit Forever

Third-quarter growth figures suggest Britain’s economy is thriving post-Brexit, but eventually the increasing political uncertainty will take its toll.
ENLARGE

Third-quarter growth figures suggest Britain’s economy is thriving post-Brexit, but eventually the increasing political uncertainty will take its toll.


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Daniel Leal-Olivas/Agence France-Presse/Getty Images

The U.K. economy hasn’t been knocked off course by Brexit yet. That will curb the Bank of England’s appetite for action for now.

Thursday’s data showed forecast-beating growth in the third quarter of 0.5%, certainly welcome news, and in line with the average pace of the previous four quarters, suggesting some momentum. Gross domestic product is now 8.2% above its precrisis peak, the Office for National Statistics said.

But there are also familiar reasons for concern. U.K. officials have talked a lot about rebalancing the economy to revive manufacturing and reduce reliance on services, but nothing has changed. Growth in the third quarter was all down to services, with agriculture, production and construction output all declining.

GDP is of course backward-looking, and the Brexit debate has moved on since the end of September. The clash between the politics and economics over the U.K.’s departure from the European Union has only really just got going. Sterling has fallen by more than 5% against the dollar in October, shaken by rhetoric from U.K. politicians that has suggested a greater risk of economic disruption in the future.

That is likely to push inflation up further and faster than the BOE had been expecting. It is also likely to lead to real wages being squeezed again in 2017—a painful prospect for U.K. consumers. The lack of clarity over the shape and form of Brexit is likely to weigh on investment too.

The BOE came in all guns blazing in August, cutting rates and restarting bond purchases. Next week’s policy meeting looks unlikely now to lead to new action, as the economy has clearly been more resilient than policy makers feared. Indeed, the focus will be on those policy makers who were skeptical about August’s big push and now have more arguments for keeping policy on hold.

The reaction of sterling, which has become the Brexit barometer, tells the story: it rose briefly against the dollar Thursday morning but then fell back. Good economic news is only worth so much in the face of so much political uncertainty.

Write to Richard Barley at richard.barley@wsj.com

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Published at Thu, 27 Oct 2016 11:43:12 +0000

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