U.K. Economic Stamina Not Assured After Early Brexit Resilience

(Bloomberg) -- The U.K. economy has shown some post-Brexit strength. All it needs now is stamina.

Focus is on whether the economy can sustain the initial robust readings that came last week. Labor-market resilience and the best retail-sales growth in any July since 2002 helped push Citigroup Inc.’s Economic Surprise Index, which measures the data’s strength relative to analysts’ forecasts, to its highest since 2013.

Those reports -- the first official numbers since the June referendum -- confounded expectations for a slowdown. Investors pared bets for a Bank of England rate cut by November, and the pound posted its best weekly gain in more than a month.

While the new data suggest the U.K. is shrugging off economists’ warnings about post-Brexit turmoil, Joe Grice, chief economist at the country’s statistics office, said it’s too early to be definitive, and one week of numbers don’t give the full picture. He told Bloomberg Television that “the story is still to unfold,” noting that there’s limited information so far on business activity and trade.

“Anyone telling you that it’s Armageddon is lying and anyone that’s telling you it’s all dandy is lying,” said Grant Lewis, an economist at Daiwa Capital Markets in London who previously worked at the U.K. Treasury. For the markets to start pricing out a rate cut by November, “it’s too early on the back of one retail-sales release.”

Sterling was little changed at $1.3081 as of 9:35 a.m. London time. The currency gained 1.2 percent against the dollar last week, the most since the week ending July 15.

While the BOE has already reduced its key interest rate since the Brexit vote -- the first such action in more than seven years -- a majority of policy makers expect another move if the economy deteriorates in line with their central forecast.

Still, the data may lay the groundwork for a more fundamental reassessment of the policy outlook if the economy continues to perform better than anticipated in the face of the Brexit shock. Industrial production and trade figures for July -- the first full month after the EU referendum -- will be published in early September.

Data this week from the Confederation of British Industry on manufacturing and retail sales will give an indication of how the economy performed in August, while gross domestic product numbers on Friday will show how business investment fared in the run up to the referendum.

The BOE sees growth of just 0.8 percent in 2017, down from an expected 2 percent this year.

“If the hard data over coming months continue to surprise to the upside -- and we will need a few months to know for sure -- there is just a chance that the economy will hold up better than many economists expect,” said Victoria Clarke, an economist at Investec Securities in London. That “might lead monetary and fiscal policy makers to ease back on calls for further stimulus measures.”

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net. To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Emma Charlton, Fergal O'Brien