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The manner and the effects of the UK’s exit from the European Union are riven with uncertainties.
But, four months on from the referendum, we have a clearer picture about the near term consequences for the economy.
After a slump in the aftermath of the referendum many measure of activity, especially in the consumer sector, have bounced back. One of the strongest recent releases was Deloitte’s consumer confidence tracker. It reported that in mid-September optimism among the 3,000 adults surveyed rose to the highest level in 5 years. Consumers may be a good spirits but, as we observe below, the same does not hold for the corporate sector.
Economists reacted to the referendum result by sharply reducing their forecasts for UK growth for this year and next. The subsequent resilience of much of the economic data has quelled fears that the UK might fall into recession next year and has generated upward revisions to growth forecasts.
For this year the consensus, or average forecast for UK GDP growth, at 1.9%, is up from a post referendum low of 1.6% and is slightly higher than it was before the vote.
But the leave vote has hit forecasts for growth next year hard. The consensus view is that UK growth will post growth of just 1.0% in 2017. That’s a little higher than the 0.7% rate forecast in July but would represent a sharp slowdown, similar to the one which occurred in 2012 as the UK felt the effects of the euro area crisis and the region’s recession.
Recent data underscore the headwinds facing the UK economy.
UK inflation is off the floor and reached 1.0% in September, hardly a dizzying rate but still the highest level in almost two years. This is the start of what is likely to be a continued rise in inflation fuelled by a weaker pound. In a year’s time the consensus sees inflation running around the 2.5% mark, slightly higher than the expected growth of earnings. Inflation will squeeze consumer firepower next year, and household spending, the big driver of GDP growth, is likely to suffer.
Corporate sentiment is pretty subdued. The British Chambers of Commerce's latest survey shows business confidence and investment expectations at the lowest level in four years. The Deloitte CFO survey, carried out in September, showed only a modest recovery from the post-referendum lows, with Chief Financial Officers focussing on reducing costs. The message from these, and a number of other business surveys, is that the uncertainties generated by Brexit are likely to lead to a fall in corporate hiring and investment next year.
After a slowdown in 2017 most economists see the pace of UK growth accelerating in 2018 as the initial Brexit shock subsides. In its latest forecasts, for instance, the International Monetary Fund estimates UK growth will average 1.6% in each of the years between 2018 and 2021.
The bad news is that this compares with a pre-referendum forecast for average growth in these years of 2.2%. The IMF reckons Brexit will knock roughly 0.6% off the UK’s medium term growth rate.
Of course all economic forecasts, especially longer-term ones, are pretty speculative. The future rarely turns out exactly as expected; as Donald Rumsfield observed, “stuff happens”. But while the consensus is fallible it does represent the market’s best current guess of where things are heading. At the moment the view is that Brexit will take a big chunk out of UK growth next year and will act as a dampener on the subsequent recovery.
Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.