It’s ‘Rainy’ Season for Brexit Barometer

(Bloomberg) -- February marked the third straight month that the Bloomberg Brexit Barometer was in “rainy” territory,  amid increasing uncertainty about what exactly will happen when the deadline for Britain to leave the European Union arrives on March 29.

The barometer rose slightly to minus 4.5 last month from minus 7.1 in January, the lowest monthly reading in more than five years. In late February, the daily measure even returned to a positive reading, into “windy” conditions. But it quickly fell back amid indications that no solution is in sight—even as a key vote on U.K. Prime Minister Theresa May’s Brexit deal looms in the House of Commons this week.

The gauge’s three-month stretch in negative territory is the first time it’s been that weak since right after the 2016 Brexit referendum.  At current levels, it shows the U.K. economy is lagging below its long-term average. The barometer includes data for growth, labor market, inflation and other key economic indicators.

It’s ‘Rainy’ Season for Brexit Barometer

Interestingly, three of the barometer’s four components were positive on average in February, with the uncertainty measure solely responsible for keeping the top-line figure down. Gauges of volatility in U.K. stocks and the currency market were both at multi-month highs, while three European Commission measures of consumer confidence were generally negative.

What Bloomberg’s Economists Says

Despite remaining in negative territory, the pickup in the barometer is a welcome sign. Still, the economy isn’t out of the woods yet. Events this month will set the tone for the rest of the year. Get a deal and there is likely to be a bounce, but a delay, especially a short one, could keep a lid on growth for the foreseeable future.
—Bloomberg economist Dan Hanson

The February average was somewhat buoyed by a lower-than-expected January inflation figure, slipping below 2 percent for the first time in two years. The February inflation data are due on March 20. Bloomberg Economics expects U.K. consumer-price growth to average 1.9 percent in the first quarter. 

It’s ‘Rainy’ Season for Brexit Barometer

The picture is still rather bleak. The employment gauge is at its second-lowest level since December 2012 and the real-time activity measure fell to its lowest since the immediate aftermath of the Brexit vote, with the services sector showing particular weakness.

Britain is currently due to leave the EU at the end of this month with or without a deal, but a postponement in the process is looking more and more likely. Negotiations have become acrimonious as the EU and the U.K. try to find a way to make the so-called Irish backstop more palatable ahead of the vote on Tuesday.

The impact of a no-deal Brexit would be “a material economic shock,” Bank of England Governor Mark Carney told a House of Lords committee on March 5. The BOE said it is establishing more buffers for the banking system as the prospect of a messy divorce continues to hit companies and consumers.

©2019 Bloomberg L.P.