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
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
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