Chart O’ the Day: The Post-Brexit Bounce

For a long time now, we have held the opinion that political uncertainty over Brexit, rather than Brexit itself, was the chief headwind against the UK economy. Accordingly, once politicians stopped fighting and dithering and got on with it, we believed simply having clarity on the matter would enable businesses to stop waiting, stop stockpiling for deadlines that came and went, and start producing and investing as they normally would during an expansion. It is early days yet, but IHS Markit’s Purchasing Managers’ Indexes (PMIs) suggest this is coming to fruition.

PMIs are surveys measuring the percentage of businesses that report increased activity in a given month. Readings over 50 mean over half of businesses reported growth, which is a loose indication the economy overall grew. It isn’t exact, as it doesn’t measure how much activity rose or fell. But if the majority of businesses are growing, that is generally a good sign.

Last year, the composite PMI—which combines services, manufacturing and construction—spent a lot of time below 50. It dipped on the eve of each abandoned Brexit deadline and remained in contraction in November and December as the general election threw everything in limbo and businesses apparently entered wait-and-see mode. But in January, it jumped above 50—indicating expansion. The February flash estimate, released Friday, showed it stayed there.

Exhibit 1: PMI and Brexit

Source: FactSet and IHS Markit, as of 2/21/2020. Final Composite PMI Output Index, January 2018 – January 2020, and Flash Composite PMI Output Index, February 2020.

Notably, February’s results remained strong even as factories reported supply chain hiccups related to the coronavirus. As IHS Markit’s press release summed up: “Survey respondents noted that receding political uncertainty since the general election continued to translate into higher business activity and greater willingness to spend among clients.” Some have labeled this phenomenon a “Boris Bounce,” highlighting Prime Minister Boris Johnson’s electoral landslide, implying businesses’ main source of confidence is a Conservative government and charismatic leader. We think that is a stretch, considering many of the proposals emerging from Downing Street in recent weeks aren’t exactly stonkingly pro-business. A more likely explanation, in our view, is the fact that Johnson’s 80-seat majority made Brexit a foregone conclusion. With shifting deadlines a thing of the past, businesses could finally get on with it.

Don’t take this to mean we are forecasting a UK economic boom, as Brexit clarity is just one factor. Plus, the theatrics aren’t over yet, as the UK and EU have until yearend to finalize a trade agreement. If that date approaches without substantial progress, we will probably hear more no-deal Brexit chatter, which may spark another round of uncertainty. If that happens, remember PMIs’ recent stretch shows the impact is temporary, not a sign of fundamental economic weakness, and look forward to the tailwinds that should accompany falling uncertainty whenever it eventually arrives.