Bank of England governor Mark Carney, and veteran fund manager Richard Buxton were amongst those who anticipated a rapid descent into recession after the UK voted to leave the EU.
The fund manager Neil Woodford said before the referendum that he expected the result to have very little impact. Andrew Lillico, an economist and advocate of an exit from the EU, took the view that the fall in sterling that was the inevitable consequence of the referendum result would force Bank of England governor Mark Carney to put interest rates up, the governor had cut them the day after the referendum result was announced in an effort to stimulate sufficient economic activity that any dent to confidence caused by political uncertainty would be washed away.
Carney’s pre-Brexit pessimism has now been washed away as he recently declared that the UK would avoid recession between now and 2020.
The fall in the currency is not in itself a diagnosis of tougher economic times ahead, the currency markets always bear the brunt, as it is where the speculative capital in markets has the greatest level of dominance.
Woodford said last week that, despite his comparatively optimistic view of the outlook for the UK economy after Brexit, he has been surprised at quite how robust the economy has been.
There are two reasons the economy has held up so well.
A steep fall in the currency of a country has the effect of making that nation’s imports more competitive on international markets, which is a boost to the economy.
Additionally, the fall in the currency boosts UK companies competing for business within the UK against overseas firms.
Read more: Will UK interest rates rise in 2017?
Economic data released in recent months shows that UK exporters have been boosted since Brexit. This was not inevitable, if the global economy was itself in a trough, then there would be insufficient demand for UK goods, however cheap.
But the rise in commodity prices witnessed since the middle of last year shows that there has been an uptick in demand throughout the global economy. Growth in China, a key engine room of global demand, has also been better than expected.
The second big driver of the better than expected UK economic performance has been the consumer.
The expectation was that the fall in sterling would lead to higher inflation, while economic uncertainty would lead to a decline in labour market conditions, combining to mean that prices would rise faster than wages, causing a decline in consumer spending.
The consumer accounts for around two-thirds of UK GDP, so a decline in consumer spending would mean a slowdown in the economy.
So far, the economic data indicates that wages have risen faster than inflation, and the consumer continues to account for the great majority of GDP growth.
The UK economy is thus in something of a goldilocks situation where the benefits of the fall in sterling are feeding through but the downsides of higher inflation have yet to be felt.
The shares of retail companies have been amongst the worst performers since the referendum result, because the market worries that the intense competition in the retail sector means that companies will not be able to pass on the higher costs they face.
So even if, as expected, inflation starts to rise at a faster rate than wages later this year, it may be that the consumer is still in clover. But if prices rise faster than wages, then there would likely be a slowdown in GDP growth, most economists, including Mark Carney, expect growth to be slower in 2018 than now, but factor in growth of more than one per cent, which is far from recession territory.
Julian Chillingworth, chief investment officer at Rathbone Unit Trust management noted that unsecured bank lending in the UK started to pick up in April 2016 as banks finally had the regulatory certainty and strong balance sheets they were looking for to increase lending.
Increased lending of that kind is a positive for the economy over the medium term, as the cash borrowed today leads to more purchasing, and then to more production, which means more work, and then more consumption. This lending is unsecured, so is not just related to the housing market.
This speeding up of what economists call the velocity of the money supply is what ultimately drives economic growth.
If bank lending was slower, cash would be moving through the system at a much slower rate, as extra purchasing and production doesn’t happen, and the cash lingers on bank balance sheets.
The fact that consumers have the confidence is also a key indicator of the true health of the economy.
For those seeking to strike a cautionary note about the health of the economy, the continued decline of business investment is a concern.
Just as an increase in unsecured bank lending causes the velocity of money in the economy to speed up, slow business investment rates cause it to slow down.
If a business sees plenty of growth opportunities, it invests in new machinery, premises or technology. That creates work and wages for others, who then spend, and boost other businesses.
So if business investment is declining, it implies that companies either don’t have the cash to spend on investment, or are not confident enough in their own prospects to commit the capital.
But as the Legal and General economist James Carrick points out, the companies of today can expand far more easily without having to spend capital.
When Henry Ford created the Ford Motor Company, if he wanted to expand he had to acquire a new factory, and kit it out with machinery, a high level of business investment.
But the giant companies of today, particularly in the technology space, can expand without having to spend a lot of cash, which is bad for the business investment statistic, but may not be bad for the wider economy.
Additionally, Carrick notes that the cost of the technology companies use to expand, such as computers, has actually fallen in recent years, as more powerful computers and phones come to market, but at the same price as their inferior predecessors.
The fact that wages and employment are rising, while business investment is falling, backs up this theory.
Steven Andrew, who runs the M&G Episode Income fund told What Investment that investors shouldn’t take continued sterling weakness for granted, he remarked that the pound was not this weak against other currencies when the IMF bailed out the UK economy in the 1970s, or when the country left the Exchange Rate Mechanism (ERM) in 1992.
If sterling were to gain ground from here, then many of the assumptions underpin the current negative economic perspective in the UK would be otiose.
Peter Elston, chief investment officer at Seneca, takes the view that it is possible to understand when a recession is on the horizon, as a squeeze happens where economic activity starts to slow and interest rates have been rising for a while.
Such conditions do not currently exist in the UK, though a continued decline in sterling might force Mark Carney to put rates up.
The biggest threats to the UK economy between now and 2020 are likely to come from abroad.
The Eurozone has been quietly expanding of late, as political noise has abated, but the Greek debt crisis or an unpredicated election result could change that.
Global investor sentiment has also been boosted by a string of positive economic data , including from the US.
Before he came to office, Donald Trump indicated that he would embark on a spree of infrastructure spending to boost growth.
Elston noted that spending vastly extra cash in an economy that is already growing lustily tends to speed up the economic cycle, that is, quicken the journey from expansion to recession.
If Trump fails to deliver the promised extra spending, that would dent the confidence of many market participants, that could feed through to the wider economy.
If the spending happens, it may lead to an overheating in the economy, and move the US closer to the next recession. Elston takes the view that the US is the major global economy that is closest in business cycle terms, to meeting the conditions for a recession, though he feels it is ‘two or three years away.’
Many of the economic wobbles that have rocked markets in recent years have emerged from China.
The expectation of a collapse in the Chinese banking system, or of policy makers chasing growth and devaluing the currency, hasn’t yet materialised.
If China were to devalue the currency, it would export deflation to the rest of the world, which would harm economic prospects.
If the Chinese economy were to slow starkly down, the consequence is likely to be a severe slowdown in global demand.
Mark Carney doesn’t think the UK will enter recession between now and 2020, if it does, it’s likely to be the case that international factors are far more relevant than local politics.