Make-or-Break 2018 Starts Out Windy: Brexit Barometer

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(Bloomberg) -- British Prime Minister Theresa May needs all the help she can get in 2018 as time wanes for negotiators to forge a deal on the U.K.’s divorce from the EU. She didn't necessarily get it in January, according to Bloomberg’s Brexit Barometer, which wraps up the entire economy and then some in one number.

Make-or-Break 2018 Starts Out Windy: Brexit Barometer

The barometer, which includes data for U.K. growth, labor market, inflation and other key economic indicators, rose to 19.5 last month from 16 in December, but January also marked the sixth month in a row of “windy” conditions.

The increase was entirely due to more certainty in the economy and the financial markets and was enough to offset a worsening employment situation: That component of the barometer slipped to an 18-month low. Measures of economic activity, including business sentiment in the construction and industry sectors, also suffered.

Economist Comment

“The barometer suggests there is unlikely to be a material change in fortune for the economy in the first quarter - growth is likely to remain modest while the labor market remains tight. That's likely to be enough to convince the Bank of England that upping its hawkish rhetoric last week was the right move.”
—Bloomberg economist Dan Hanson

The barometer is calculated every day with the most up-to-date data available. The monthly average captures the economy’s longer-term trajectory and provides more clues to future direction.

While not included in either the daily or monthly barometer, some more closely watched but lagging economic releases from January reveal a mixed picture. On the positive side, gross domestic product growth came in 0.1 percentage point above expectations in the fourth quarter of 2017, with industrial production picking up in November after stagnating in October and inflation ticking down in December to 3 percent.

Make-or-Break 2018 Starts Out Windy: Brexit Barometer
Less positive: the increase in jobless claims was revised up for November by 6,300, and IHS Markit’s Purchasing Managers Indexes for U.K. manufacturing and construction both fell in December.

Political Backdrop

It was a tumultuous January as various factions in May’s Cabinet continued a messy public debate about what a deal should look like. Case in point: Chancellor of the Exchequer Philip Hammond told a group in Davos that he hoped for a modest Brexit, while Trade Secretary Liam Fox shot down any possibility of the U.K. staying in the EU customs union. 

The barometer is powered by four data feeds curated by Bloomberg Intelligence that include 22 indicators in all. In January, the measure rose as often as it fell, pointing to fluctuating levels of uncertainty in the U.K. stock market and with the pound. More broadly, the barometer has spent eight of the past nine months in “windy” territory, meaning below the 20 mark. 

The last time the barometer turned negative, or “rainy,” was in July 2016, in the immediate aftermath of the referendum vote.

January’s Most-Read Brexit Stories:

What to Watch in the Coming Weeks:

  • Feb. 23: European leaders’ summit in Brussels without Theresa May to discuss post-Brexit EU budget
  • March: Start of U.K.-EU trade negotiations
  • March 22-23: Brussels summit where leaders hope to sign off on a post-Brexit transition deal

To contact the author of this story: Andre Tartar in New York at atartar@bloomberg.net.

©2018 Bloomberg L.P.

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