The FTSE 100, the Bank of England and the Brexit paradox
"The difficulty lies not so much in developing new ideas as in escaping from old ones" - John Maynard Keynes.
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What's happening in Britain after the Brexit vote? Is Britain doing well, or doing badly? And what's the impact on companies and the stock market?
After a political earthquake, it takes time to get a picture of exactly just how things have changed. And sometimes all that we can go on are bits of evidence from data and surveys.
The story so far
So what evidence do we actually have? Well, between the three months to February 2016 and the March to May 2016 period, the number of people in work increased by 176,000. Admittedly, this data was collected prior to the 23 June vote, but it was after the announcement of a referendum in February 2016. It seems that the uncertainty over the referendum had little effect on hiring. If, as I suspect, the numbers released this month show employment increasing again, then this is strong evidence that the economy is still motoring ahead.
Then there are the GDP growth figures. GDP was estimated to have increased by 0.6% in Q2 (April to June) 2016 compared with growth of 0.4% in Q1 (January to March) 2016. So, despite the uncertainty of the referendum, the economy has been growing at a steady pace, even speeding up slightly. Again, it seems to be full steam ahead with scarcely a hint of trouble.
OK, how about industrial output? Total production output is estimated to have increased by 2.1% between Q1 2016 and Q2. That's a substantial increase and the ONS said "very few" respondents had been affected by the uncertainty from the EU referendum vote. Again, these seem to be strong figures and suggest that Britain's economy is so far unaffected by our decision to leave the EU. Likewise, retail data shows consumers continuing to spend.
And, surely, if the economy is slowing, this will affect company profits, and thus the stock market? Yet the FTSE 100 has bounced by more than 10%, and now stands at over 6,800, buoyed by a weak pound. Plus there have yet been no signs of recession.
Low confidence
This seems fairly convincing so far, but in contrast to the data, several surveys suggest business confidence is weak. Business optimism fell to 97.9 in July from 98.9 in June, though still some way above the 95 mark denoting contraction, according to a recent BDO survey. Other surveys, including manufacturing, have also been negative.
Why this dichotomy? Has the economy been ticking over nicely, only to suddenly grind to a halt? I think this is unlikely. Instead, people have kept calm and carried on, going about their normal day-to-day business. Hiring has continued, and companies and the stock market have been doing well. I think that we should learn from the data over the surveys, because human opinion is fallible, whereas data is generally more consistent and reliable.
My view is that Britain has withstood the shock of our future Brexit surprisingly well, and the economy will still thrive. A cut in interest rates and further QE will only buoy the economy even more, and the FTSE 100 could well reach 7,000 by year-end.
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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
