It won’t be possible to gauge the full effect of Brexit on the UK’s economy for several months until the official figures for third quarter growth are released and companies have had time to consider what the decision means for their day-to-day operations.
However, in the aftermath of the vote, there has been a rush of polls aiming to shed light on the post-Brexit business environment and provide investors, traders, analysts and business owners with more information in an uncertain environment.
UK corporate spending collapses after Brexit
One such poll, conducted by Credit Suisse shows a rapid deterioration in corporate sentiment. The poll, an ad hoc edition of the bank’s corporate spending survey, indicates that the UK’s corporate sector has become extremely cautious since the end of June. The survey reflects the responses of 80 European corporates and was taken over the week to July 10. This “Brexit Special” included a series of Brexit-specific questions to examine its impact on spending decisions as well as our more regular questions.
The key takeaway from the survey was that the balance of companies expecting to increase versus decrease spending has now slipped below zero at -8.8% versus 4.7% pre-referendum — the first such decrease since 2013. What is really notable about this decline, however, is the fact that it is a UK rather than continental Europe phenomenon. Spending intentions across continental Europe appear to have held their ground while spending plans in the UK have, “deteriorated out of all recognition.”
“The UK has deteriorated out of all recognition with the numbers expecting corporate spending to increase versus decrease in the UK standing at an unprecedented -52.5%.” — Credit Suisse
65% of the companies surveyed said that they would either postpone or cut spending as a result of the UK’s leave vote. Once again this was mostly limited to the UK. 11.3% of the companies surveyed said they would cut spending in the UK but increase it elsewhere. Nearly 40% of respondents said they would postpone spending in the UK pending clarity on the UK’s position in the EU while around 30% said they would leave spending in the UK unchanged and just under 5% said they would increase spending in the UK. When asked what Brexit would do to spending plans around the rest of Europe, excluding the UK, around 20% of respondents said they would postpone spending in Europe pending clarity of the UK’s position in the EU. Nearly 60% said they would leave spending in the rest of Europe unchanged and around 10% said they would increase spending and the rest of Europe.
Corporate views on staffing after Brexit are rather more negative. Nearly half the respondents suggest they would postpone hiring decisions in the UK, with 22.5% saying they would reduce employment, though 7.5% indicate they would increase it outside the UK.
What are the takeaways from all this data? Credit Suisse draws four main conclusions. Firstly, in the near-term, it’s highly likely that high-frequency UK economic data will reflect the frozen spending, employment and investment plans by corporates.
Secondly, it is likely that the Bank of England will turn more dovish and may move more aggressively to stimulate demand then the market discounts. Analysts at Credit Suisse are predicting a 45 basis point rate cut plus £75 billion in further QE.
Third, it is clear that there are now significant risks to UK economic growth although it’s not clear if UK equity valuations discount the risks that undeniably exist. Lastly, the gaping hole in UK domestic demand left by a corporate sector that is now unwilling to spend has added foundations for fiscal rather than just monetary expansion.