International Economic Week In Review: The First Post-Brexit U.K. Numbers Point To Recession

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The IMF lowered their global growth forecast by .1% on Tuesday, citing increased political and economic risk due to Brexit. Obviously, Brexit negatively affects the UK and EU, whose projections were .1% and .2% lower, respectively. The stronger yen, which will result from a flight to safety, will shave .2% off Japanese growth. The US should be largely unaffected: increased weakness caused by the strong dollar and increased corporate spreads will be offset by the stimulus from lower yields and delayed Fed action. Last year's rate cuts and increased stimulus immunized China, which also has very little direct economic interaction with the UK. None of these revisions should be surprising; at minimum, Brexit signals a tremendous change of the current world order, which has the potential to radically reshape the global economic order.

The UK's post-Brexit political environment grows increasingly convoluted. Ireland and Scotland both voted to remain in the union, placing both countries directly at odds with the Britain. While the UK has stated they will wait to formally trigger Article 50, other EU countries could try and force the UK's hand by removing the country's voting privileges. Turning to the data, some of this week's economic news was positive, but only because it contained mostly pre-Brexit results. Inflation was .5%, and unemployment dropped to 4.9%. However, the first post-Brexit Markit survey was devastatingly negative: manufacturing's PMI dropped from 52.1 to 49.1, while the service sector's headline number cratered, falling from 52.3 to 47.4. The composite reading collapsed 5 points to 47.7. The severity of the decline can only be compared to the 2009 drop - a very disturbing similarity.

In comparison to the UK's weak Markit numbers, the EU's flash reading was surprisingly encouraging. The headline number dropped a mere .2 to 52.9, still showing an expansion. The manufacturing number declined. 3 to 51.9, while the service dropped.1 to 52.9. These numbers indicate that the EU could be far less exposed to negative Brexit numbers than previously thought. This week's other EU economic development was the ECB's rate decision, which maintained current rate levels. The bank characterized EU growth as moderate, largely due to consumer spending. Corporate profit margins are improving, which should increase investment. Export growth is moderate. Uncertainty remained high: Brexit and weaker emerging markets are lowering orders and increasing uncertainty.

The only news for Japan this week was Markit's flash PMI reading, which rose .9 points to 49. Weak export orders are the primary reason for the reading below 50. Orders dropped at the beginning of the year because of a strong yen; the trend has continued with the yen's continued rally.

Canadian news was positive. Retail sales rose .2%, thanks to increased sales in 6 of 11 sub-sectors. And inflation remains under control: total CPI was up 1.5%, while prices ex-gas rose 1.9%. As shown in the following chart, the Bank of Canada has plenty of room to keep rates at current levels:

The RBA released the latest meeting minutes. The bank's analysis showed consumer spending increasing at its decade-average level, while non-mining business investment increased. Housing remained a net positive, while unemployment was 5.7% for the last three months. Overall, the picture was encouraging.

Obviously, this week's most important news came from the UK, where post-Brexit indicators point to a recession. It's very interesting that, so far, the EU appears to be somewhat immune to Brexit. That may change should the UK economy continue slowing down. But as of now, the EU appears to be in decent shape. Canada appears to me making the adjustment to lower oil prices, while Australia continues to expand. Japan, however, is still in poor shape, indicating Abenomics hasn't really fixed the economy.

Hale Stewart,

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