UK Brexit Monitor - Politico Europe€¦ · UK Brexit Monitor, 26 July 2017 2 Introduction and Background But there are clear and significant downside risks if 3 the UK and EU do

UK Brexit Monitor

JULY 2017

UK Brexit Monitor, 26 July 2017 2

Introduction and Background

But there are clear and significant downside risks if the UK and EU do not reach a deal. 3

Our base case of a ‘modest and manageable’ credit impact from Brexit remains intact. 2

This monitor covers key economic and political developments concerning Brexit, focusing on the UK. 1

1 UK Economic Indicators At A Glance


Consumption, Housing Sector Headwinds Challenge UK Growth, Despite Firm Labour Market

Note: This infographic synthesizes Moody’s UK Indicator Heatmap on slides 12 and 13. Green or red shaded arrows mark uptick or fall in key indicators. For details on our approach to looking at economic indicators please refer to box on slide 20. Most recent change refers to changes to the latest from the second-latest data point.Source: Moody’s Investors Service

Business ActivityBusiness activity surveys are in line with 5-year averages and pre-referendum levels, but GDP estimates suggest growth has slowed. In Q2, the economy expanded at a moderate pace of 0.3% over the quarter. Growth in the service sector remained below levels seen in the months after the referendum, and production and construction activity fell from Q1.

Investment sentiment is near 5-year averages and has further improved in recent months driven by the manufacturing sector. This suggests that the pick-up in actual business investment growth in Q1 may be sustained.

Consumption indicators are in line with 5-year averages and, while volatile, are signaling a prolonged moderation in consumer growth. Latest surveys for June highlight households are becoming increasingly pessimistic about their future financial situation amid rising inflation. A weaker housing market and tighter credit availability are additional headwinds.Trade balance indicators are near 5-year averages and have been volatile since the referendum. While surveys point to a notable pick-up in service export orders in the second quarter, latest data suggest UK’s trade balance from March to May was essentially unchanged from levels a year ago.

Consumer price inflation is above 5-year averages and has edged higher since the referendum on the back of rising import prices. However, prices stagnated in June over the month for the first time since December 2015.

Labour market indicators are near 5-year averages and while little changed since the referendum, volatility has increased recently. Most recent employment data for May highlights a gradual increase in labor market growth while employment intentions in the manufacturing sector picked-up, however less so in services.

Housing market indicators are trending below 5-year averages, and have fallen since the referendum. Expectations suggest house prices will continue to stagnate over the coming months.

Financial conditions are in line with 5-year averages, although they have generally eased since the referendum. However, lenders expect household credit availability to fall in Q3.

Indicator groups

Level vs.five-year average

Changesince

referendum

Mostrecentchange Key takeaways from indicator group

Labor market

Financial conditions

Prices

Housing market

Trade

Consumption

Investment sentiment

Same

Same

Same

Same

Same

Below

Above

Same

UK Economic Indicators At A Glance | Key Indicator Charts | Indicator Heat Map | Political Events Timeline | Key Political News | Appendix and Notes

2 Key Indicator Charts


Slowdown In UK GDP Growth Extends Into Second QuarterExhibit 1: UK Economy Grew Moderately in Q2 Compared With Past Three Years

Source: ONS Source: ONS

Exhibit 2: Weaker Construction and Manufacturing Weighted On Q2 Growth


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Q2-14 Q2-15 Q2-16 Q2-17

%

UK: Real Gross Domestic Product (SWDA,%y/y)UK: Real Gross Domestic Product (QoQ %)

-0.1

0.0

0.1

0.2

0.3

0.4

Agriculture Production Construction Services

% C

ontri

butio

n to

GD

P G

row

th

GDP Grew 0.3% in Q2


Note: A PMI reading of above (below) 50 suggests a majority of respondents reported improving (deteriorating) conditions from previous month. Source: Haver Analytics

Exhibit 4: Recovering Sentiment Signals Sustained Pick-up in Business Investment

Surveys Point to Moderating Economic Activity, Pick-up in Business InvestmentExhibit 3: PMIs Highlight Moderating Economic Activity

Note: Investment Intentions for Q2 2017 are averaged values for April and May. Source: Haver Analytics


45

50

55

60

65

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Inde

x

U.K. Composite Output PMI: Total Economy (SA, 50+=Expansion)

U.K. PMI: Manufacturing (SA, 50+=Expansion)

U.K. PMI: Services Business Activity (SA, 50+=Expansion)

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

0.0

0.5

1.0

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Q2-12 Q2-13 Q2-14 Q2-15 Q2-16 Q2-17

Investment Intentions: Manufacturing (NSA, % Bal)

Investment Intentions: Services (NSA, % Bal)

Real Gross Fixed Capital Formation: Business Investment(YoY% Chg, rhs)

Bal

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Headwinds to Consumption Growth From Tighter Credit Pick-up, While Export Orders Have Risen

Note: Q2 shows change in the UK’s trade balance calculated from March to May 2017 over March to May 2016.Source: Haver Analytics

Exhibit 6: Export Orders Have Picked-up in Services, Alongside Manufacturing

Exhibit 5: Headwinds to Consumption Growth From Tighter Credit Availability Have Risen

Source: Haver Analytics


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-6

-4

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45

Q2/2012 Q2/2013 Q2/2014 Q2/2015 Q2/2016 Q2/2017

UK: BCC Survey: Manufacturing: Export Orders, Balance (% Bal)UK: BCC Survey: Service: Export Orders, Balance (% Bal)Trade Balance (YoY Chg in GBPbn, rhs)

% d

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Pbn

-50

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-4%

-2%

0%

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Q2-07 Q2-09 Q2-11 Q2-13 Q2-15 Q2-17

Household Real Final Consumption Expenditure (YoY Chg)UK: BoE Srvy: Availability of Household Unsec Credit, Next 3M (rhs)

% d

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Employment Growth Strengthens, But Housing Market Showing Signs of Weakness

Exhibit 8: House Price Growth and Future Expectations Have Moderated

Exhibit 7: Hiring Intentions Suggest Gradual Pick-up in Employment Growth to Persist

Note: Employment Intentions for Q2 2017 are averaged values for April and May. Source: Haver Analytics Source: Haver Analytics


-3

-2

-1

0

1

2

3

-2.0

-1.5

-1.0

-0.5

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Q4-11 Q4-12 Q4-13 Q4-14 Q4-15 Q4-16

UK: BoE Agents' Srv: Labor Mkt: Employment Intentions:Manufacturing(NSA, % Bal)UK: BoE Agents' Survey: Labor Market: Empl Intentions: Services (NSA,% Bal)UK: LFS: Employees (YoY Chg, rhs)

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-30

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Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

RICS Survey: Price Expectations Next 3 Months(SA, % Balance, 3Mlag)Nationwide Building Society House Price Index (YoY% Chg, rhs)

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Monetary Policy Watch: Markets See Chance of the Bank of England Increasing Rates By Year-End Near 40%Exhibit 9: Probability Of Bank Rate Prevailing At Higher Levels Than Current 0.25%

Source: Bloomberg.


Note: Probabilities are calculated for the day of monetary policy committee meetings (x-axis) from Overnight Index Swap (OIS) contracts. As of 26/07/2017.

0%

10%

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03-Aug-17 14-Sep-17 02-Nov-17 14-Dec-17 08-Feb-18 22-Mar-18 10-May-18 21-Jun-18

3 Indicator Heat Map


While UK’s Labour Market Remains Firm, Consumer and Housing Sectors Continue To Trend Weaker

Note: Cells denote z-scores of indicators. A reading of 0 suggests the indicator is on its five-year (rolling) average while a reading above (below) 0 is indicating a level above (below) its five-year average. The further the number is away from zero the larger is the distance to the five-year average. A green (red) color indicates the indicator change to the previous month has been large and positive (negative) as gauged relative to past five-year volatility. The darker the shade the larger the change. For prices, unemployment expectations, exchange and interest rates the color scale is coded inversely, implying a sufficiently large fall will be flagged as green. Column ‘Apr-16 – Latest’ marks changes in z-scores of indicators with a ‘+’ or ’-’ if larger than +0.25 or -0.25. The cell is colored in green or red if the change is larger than +1 or -1. The darker the shade the larger the change. Column ‘Detrended’ marks indicators that have been linearly detrended over a rolling five-year window before z-scores are applied (to account for the general upward trend in this series). Column ‘Forward looking’ marks survey indicators based on questions about future economic conditions. Months for which no indicator data are available are greyed. Underlying data has been sourced from Haver Analytics. Further explanations are given in box on slide 20. Source: Haver, Moody’s Investors Service

Exhibit 10: UK Macro Indicator Heatmap


June-16 - Latest Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17

Detrend-ed

Forward looking

Business ActivityComposite Output PMI + -0.9 -2.3 -0.5 -0.4 -0.1 0.0 0.4 0.0 -0.5 -0.1 0.3 -0.3 -0.5Industrial Production: Capital Goods - 1.1 -0.1 0.3 0.5 -0.5 -0.3 1.9 1.6 1.7 0.7 0.6 0.4 xConstruction Output: New Private Housing - 0.2 0.3 0.1 0.0 -0.3 -0.2 0.3 -0.6 -1.4 -0.2 -2.7 -2.7 xConsumer Services Turnover (BoE Survey) - 0.5 0.3 0.3 0.2 0.4 0.3 0.3 0.1 -0.2Manufacturing Output for Export (BoE Survey) + -1.4 -0.7 -0.6 0.0 0.2 0.8 1.0 1.5 1.8InvestmentInvestment Intentions: Manufacturing (BoE Survey) + -1.2 -1.6 -1.9 -1.5 -1.6 -1.3 -0.3 0.1 0.5 xInvestment Intentions: Services (BoE Survey) o -0.3 -1.5 -2.0 -1.7 -1.7 -1.4 -0.9 -0.7 -0.6 xConsumption Consumer Confidence HH Financial Situation Exp: Next 12M - 1.3 0.0 0.7 1.1 0.9 0.3 0.4 1.0 0.4 0.3 0.1 0.4 -0.3 xConsumer Confidence Unemployment Exp: Next 12 M + 0.1 0.2 -0.2 -0.6 -0.4 0.1 0.0 0.0 0.0 -0.2 0.2 0.3 0.4 xRetail Sales ex Automotive Fuel (Volume) - 0.8 2.0 1.7 1.3 2.6 2.0 -0.3 -0.8 0.1 -1.3 0.4 -1.4 -0.8 xNew Private Car Registrations (YoY chg) o -1.2 -1.4 -0.8 -1.0 -0.9 -1.0 -1.5 -0.4 -1.4 -0.4 -3.5 -2.0 -1.4TradeTrade Balance: Goods and Services + -0.3 -0.5 -2.0 -2.2 1.9 0.6 0.9 0.3 0.4 -0.6 0.7 -0.1Goods Trade Balance with the EU + -1.5 -0.9 -1.3 -1.9 -1.1 -1.6 -1.5 -1.3 -1.4 -1.2 -1.0 -1.1Effective Exchange Rate (narrow, average for month) - -0.1 -1.4 -1.6 -1.5 -2.4 -1.9 -1.5 -1.7 -1.5 -1.7 -1.3 -1.2 -1.5Terms of Trade: Goods (export as % of import prices) - 0.8 0.9 2.1 2.1 2.6 1.1 1.4 0.8 0.9 0.6 0.6 0.4

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Exhibit 11: UK Macro Indicator Heatmap (con’t)

While UK’s Labour Market Remains Firm, Consumer and Housing Sectors Continue To Trend Weaker

Note: Cells denote z-scores of indicators. A reading of 0 suggests the indicator is on its 5-year (rolling) average while a reading above (below) 0 is indicating a level above (below) its 5-year average. The further the number is away from zero the larger is the distance to the 5-year average. A green (red) color indicates the indicator change to the previous month has been large and positive (negative) as gauged relative to past 5-year volatility. The darker the shade the larger the change. For prices, unemployment expectations, exchange and interest rates the color scale is coded inversely, implying a sufficiently large fall will be flagged as green. Column ‘Apr-16 – Latest’ marks changes in z-scores of indicators with a ‘+’ or ’-’ if larger than +0.25 or -0.25. The cell is colored in green or red if the change is larger than +1 or -1. The darker the shade the larger the change. Column ‘Detrended’ marks indicators that have been linearly detrended over a rolling 5-year window before z-scores are applied (to account for the general upward trend in this series). Column ‘Forward looking’ marks survey indicators based on questions about future economic conditions. Months for which no indicator data are available are greyed. Underlying data has been sourced from Haver Analytics. Further explanations are given in box on slide 20. Source: Haver, Moody’s Investors Service


June -16 - Latest Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17

Detrend-ed

Forward looking

PricesCPI: All Items (YoY chg) + -1.0 -0.9 -0.8 -0.6 -0.6 -0.4 0.0 0.4 0.7 0.8 1.2 1.4 1.2CPI: All Items ex Energy, Food, Alc & Tobacco (YoY chg) + -0.7 -0.9 -0.8 -0.5 -1.0 -0.6 -0.2 -0.2 0.6 0.2 1.6 1.8 1.6RPI: All Items (YoY chg) + -0.8 -0.6 -0.6 -0.4 -0.3 -0.2 0.2 0.4 1.1 1.0 1.5 1.6 1.4PPI: Imports (YoY chg) + 0.8 1.8 2.1 1.9 2.9 2.8 2.7 2.7 2.4 2.2 1.8 1.7 1.5PPI: Exports (YoY chg) o 0.7 1.2 1.3 1.1 1.5 1.4 1.1 1.0 0.9 1.0 0.8 0.9 0.9Labor MarketNumber of Employees and Self-Employed - 0.1 -0.7 0.2 -0.9 -1.9 0.2 -0.9 -2.1 -0.6 0.6 -2.4 -0.2 xPart-Time Employees (3M moving average) - 0.2 1.2 0.5 0.5 0.0 -0.3 -1.1 -2.4 -1.9 -1.9 -1.2 xEmployment Intentions: Manufacturing (BoE Survey) + -1.2 -1.2 -1.0 -1.1 -0.5 -0.3 0.0 0.2 0.8 xEmployment Intentions: Services (BoE Survey) o -0.5 -0.8 -1.1 -1.0 -1.1 -0.7 -0.7 -0.6 -0.6 xHousing MarketHouse prices (Halifax) - 1.4 0.6 0.1 -0.1 0.3 0.3 0.8 -0.4 -0.8 -1.4 -1.8 -2.1 -3.1 xPrice Expectations Next 3 Months (RICS Survey) + -1.5 -0.9 -0.2 0.0 0.1 -0.2 -0.3 -0.2 -0.2 -0.3 -0.6 -1.0 -0.8 xNumber of Approved Mortgages for House Purchase + -1.4 -2.0 -1.9 -1.5 -0.7 -0.8 -0.8 -0.5 -0.7 -1.0 -1.1 -1.0 xFinancing ConditionsUnsecured Lending Rates: Pers Loan o -1.1 -1.2 -1.1 -1.1 -1.4 -1.3 -1.3 -1.3 -1.3 -1.2 -1.1 -1.1 -1.1Rate On NFCs New Loans - 1.4 -0.5 -0.6 -1.2 -1.2 -1.4 -2.9 -1.8 -0.8 -1.2 -1.9 -2.410 Year Government Bond Yield + -1.9 -2.6 -2.8 -2.5 -1.9 -1.2 -1.1 -1.1 -1.3 -1.4 -1.6 -1.4 -1.4FTSE All Share + -1.6 -0.6 -0.1 -0.1 0.3 -0.2 0.1 0.8 0.8 1.0 0.8 1.2 1.2 xExp Corporate Credit Availability Next 3M (BoE Survey, Chg QoQ) o -0.9 -0.8 -0.7 -0.7 -0.7 xExp Household Credit Availability Next 3M (BoE Survey, Chg QoQ) - 0.8 -0.8 -1.7 -2.6 -2.0 x

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4 Key Political Events and News


Timeline of Key Political Events

Source: Moody’s Investors Service.

Till Aug Sept to Dec Jan to Apr May to Aug Sept to Dec Jan to Apr

* Upon advice from EU Chief Negotiator Michel Barnier.

March 2019Negotiation windowstipulated by A-50

expires

May 2019European Parliament

elections

United Kingdom

European Commission

European Parliament

National Politics

Council

24 September 2017Elections in Germany

February 2018 Elections in Italy (to be confirmed)

19 June 2017Start of the negotiation on

terms of withdrawal

January 2018 Start of future

framework talks?

End-2018/ Early-2019 Ratification?Late Autumn 2017

Drafting and Adoption of guidelines on future

framework talks (uponCouncil decision)

Autumn 2017Decision whether sufficientprogress made to launchfuture framework talks*

October 2018: Deadline forsubstantial negotiations

Autumn 2017: Resolutions on Brexit; Citizens’

rights, Union Budget, Border Issues, Economic frameworks, Agriculture & Regional policies

2017 2018 2019

20/21 October 2017 Legislative Electionsin the Czech Republic

December 2017 Special Summit on

agreement on principles of withdrawal?

Elections in Austria, Hungary, Latvia, Sweden



Second Round Of ‘First-Phase’ Negotiations Highlights Divergences On Citizens’ Rights, Financial Settlement

Note: For more detail see Speaking points by Michel Barnier at the press conference following the second round of Article 50 negotiations with the United Kingdom, 20 July.

» UK-EU discussions on the issue of citizens’ rights highlight divergent policy positions on future family member rights, the removal of certain benefits and the rights of UK citizens resident in the EU to freely move within EU-27 after the withdrawal. Conflicting views between the UK and EU on enforcement of rights, with the UK seeking to sole responsibility to lie with its domestic judicial system.

» The UK recognises existence of financial obligations beyond the date of withdrawal and the need to settle. Both parties have conducted ‘detailed’ legal analysis of financial commitments, but the EU says further clarification of the UK’s position is ‘indispensable’ as a basis for negotiating financial settlement.

» The UK and EU agreed on the need for more detailed discussions to meet an arrangement protecting the cooperation between Ireland and Northern Ireland as part of the ‘Good Friday Agreement’. Both parties agreed that the UK should clarify its position on maintaining the Common Travel Area after leaving the EU in the third round of negotiations in late-August.


http://europa.eu/rapid/press-release_SPEECH-17-2108_en.htm


Background: Organisation of ‘First-Phase’ Brexit talks

Note: For indicative dates of negotiation rounds please refer to Terms of Reference for the Article 50 TEU negotiations.

» The UK and the EU have issued terms of reference for the Article 50 negotiations and have agreed that the first phase of the negotiations will focus on issues related to the UK’s withdrawal.

» The structure of the negotiations will see Citizen’s rights and Financial Settlement matters discussed in parallel and in separate groups. In addition, a dialogue on issues related to the border between Ireland and Northern Ireland will be initiated.

» According to the published schedule, the terms of withdrawal will be discussed in five-week long negotiation rounds, lasting until mid-October.


https://www.gov.uk/government/publications/terms-of-reference-for-the-article-50-negotiations-between-the-united-kingdom-and-the-european-union


Government Outlines Plans For Delivering Legislative Foundations of Brexit in “Queen’s Speech”

Note: Commentary based on Queen’s Speech 2017: background briefing notes.

» The government announced plans to enact eight bills for delivering a ‘smooth and orderly’ Brexit. These include: – the ‘Repeal Bill’, published on 13 July, which would convert EU law into

national law once the UK leaves the Union.– the ‘Customs Bill’, which would provide a legislative framework allowing the

government to charge duties on imported goods and control goods trade.– the ‘Trade Bill’, which would establish a framework for pursuing

independent national trade policies upon exit.– the ‘Immigration Bill’, which would allow the government to end the free

movement of labour as constituted in EU law and make migration of EU citizens subject to UK laws.

» Further bills are focussed on fishery, agriculture, nuclear and international sanction matters.


https://www.gov.uk/government/publications/queens-speech-2017-background-briefing-notes

5 Appendix


Appendix

Our approach to looking at economic indicator trends:Analyzing a broader set of economic indicators tracking different variables, such as output, price and employment, can unveil significant information concerning a country’s macroeconomic state. At the same time, indicators can vary considerably over time and their volatility may differ significantly, making it difficult to filter and compare their ‘signals’. As such, we look at both indicator levels and changes to extract unusually low or high realizations and large swings that potentially reveal important information. In doing this, we calculate separately how far indicator levels and their (monthly) changes are away from five-year averages in terms of the number of standard deviations (i.e. z-scores).

For Levels: normalised level of indicator = (Latest value-five year average) / (five year standard deviation)

For Changes: normalised change of indicator = (Latest change-five year average change) / (five year standard deviation of changes)

Normalised this way, all indicators and their changes are standardised into numbers typically ranging between -4 and +4 and can be easily compared against one another. We use a five-year rolling window to reflect their typical behavior through the business cycle. We linearly detrenda number of series, including industrial production, construction output, retail sales, number of employees (total and part-time), house prices, approved mortgages and equity prices, to take into account the general upward trend in these indicators.

Our heatmap shows the normalised level of the indicator for the respective month (if data are available). A reading of zero implies that the indicator stands at its five-year average. A positive or negative figure indicates it being above or below five-year averages. The further the number is away from zero the larger is the distance to its average.

Where the change to the previous month is larger than +1 or -1 standard deviations of past five-year changes, the cell is highlighted in either green or red. For prices, unemployment expectations, exchange and interest rates the color scale is coded inversely, implying a sufficiently large fall will be flagged as green.

Notes:» The indicators presented in this report reflect changes to UK economic and financial conditions since the ‘Brexit’ vote in June 2016.» Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both the likelihood of a default

on contractually promised payments and the expected financial loss that would be suffered in the event of default. Ratings are intended to capture enduring changes in credit risk, rather than transient changes in market sentiment. Changes in short-term indicators do not mechanistically lead to changes in credit ratings.

» Please refer to Moody’s Sovereign Rating Methodology for details on Moody’s approach to assessing sovereign credit risks.



Moody’s Related Research

» 'No deal' Brexit would be significantly credit negative for some UK-based issuers ,17 July 2017

» Life Insurance - UK: Expectation of a moderate impact from Brexit drives stable outlook , 22 June 2017

» UK election result heightens uncertainty over Brexit negotiations and increases fiscal risks, a credit negative, 9 June 2017

» Brexit Impact on Insurance Sector: Moderate and Manageable Risks, 24 May 2017» Structural Features Mean Limited Credit Impact From Brexit Legal Uncertainties, 23

March 2017 » Credit Impact of Brexit Will Be Modest and Manageable for Most UK Issuers If Shared

Interests of UK, EU Underpin Deal, 22 March 2017 » UK Universities' EU Undergraduate Student Applications Decline, a Credit Negative, 6

February 2017» Airports to Withstand Short Term Impacts but Airlines Weakened by Fall in Sterling, 3

February 2017» Government of the United Kingdom: Prime Minister’s Brexit speech provides clarity on

UK objectives, but end-game still open, 18 January 2017

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1082514




https://www.moodys.com/research/Structured-Finance-Europe-Structural-Features-Mean-Limited-Credit-Impact-From--PBS_1060317


https://www.moodys.com/research/UK-Universities-EU-Undergraduate-Student-Applications-Decline-a-Credit-Negative--PBC_194292



Fabian Philipp HeroldAssociate [email protected]+44.20.7772.8661

Rahul GhoshVice President –Senior Credit [email protected]+44.20.7772.1059

Colin EllisManaging Director –Chief Credit Officer [email protected]+44.20.7772.1609


http://www.moodys.com/thebigpicture

http://www.moodys.com/thebigpicture


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