Business confidence has rebounded strongly in the UK following the initial shock of the vote to leave the EU.
The figures follow on from strong manufacturing PMI figures last week. Both indicate the UK is moving from contraction into expansion. However, investors should be careful of reading too much into the confidence figures as they are likely to have overshot as businesses gave a sigh of relief that things did not turn out as bad as expected.
The UK economy could be entering a bit of a sweet spot as it benefits from the fall in the pound as well as the central banks’ interest rate cut and quantitative easing. At the same time the UK could remain in the single market until the end of the decade.
However, there are headwinds on the horizon for the UK economy. The consequence of a lower pound is rising prices – both input and output prices are at five year highs indicating inflation might pick up sharply which could restrict any improvement in the UK economy.
The effect of the Brexit vote on the UK economy is still unclear and the data has swung quite wildly from one extreme to the other. Whilst we believe a recession will be avoided there will be some winners and losers and with markets having rallied strongly since the vote, investors need to be diversified, not just across global equities but across different asset classes.