Friday, August 5, 2016

Where is the BREXIT impact in Europe?

The Bank of England moved today – and as it should!  But when will the UK’s self-inflicted economic troubles seep into other markets and economies? Like other market participants, I waited for Market’s PMIs for evidence that uncertainty related to BREXIT will hit euro area growth this year. Well, that day came and went with no hint of BREXIT hitting economic progress. Rather, the actual July release was above Bloomberg expectations. At first blush, this means that economic confidence, and especially confidence associated with tradeable goods or the manufacturing sector, will go relatively unscathed in the post BREXIT world.

It’s too early to tell…look more closely

While current confidence indicators are broadly following a trend already established, there are cracks starting to emerge. Specifically, there is a divergence across markets that is likely attributed to weakness and uncertainty in the UK. Italy, Spanish and Irish manufacturing PMIs have all taken a discrete and trended tumble since April.

Click for closer view: FIGURE 1 - PMIs

With the exception of Italy, this move in the PMIs can be associated with dependence on UK final demand, as the OECD’s TiVA data show Ireland and Spain contributing 12.7% and 9.3%, respectively, to the UK’s 2011 final demand (the latest data point).

Click for closer view: FIGURE 2 - VALUE ADDED FROM UK DEMAND

On the flip side, look at what’s happening in Germany and Austria, both with relatively low dependence on UK final demand.

Click for closer view: FIGURE 3 - PMIs Germany, Austria, Netherlands

I would say there’s evidence, especially in Ireland and Spain, that BREXIT is impacting European growth. Furthermore, I suspect there is more disappointment from European growth to come – and look more broadly than the Eurozone.

Click for closer view: FIGURE 4 - VALUE ADDED FROM UK DEMAND

Norway, for example, has flown under the radar as regards second round economic impact from BREXIT. Currently growth is holding on, but will likely suffer as the UK recession drags on.

Based on this analysis, I would expect the recession in the UK to have larger impact than is currently being touted.

Rebecca Wilder

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