Last week two of the UK's leading economic forecasters
concluded that Brexit is unlikely to cause a sharp slowdown in UK
growth over the next three years. This is big news.
Last summer, in the weeks after the referendum, talk of the UK
falling into recession was rife. Economists slashed their UK growth
forecasts. By August economists expected GDP growth would fall away
in the second half of 2016 as Brexit hit home. They saw the UK
eking out meagre growth of 0.6% in 2017, the slowest since the
recession in 2009.
Instead activity accelerated from the middle of last year and
for 2016 as a whole GDP growth came in at 2.0%, the best of any
major industrialised nation. Consumers kept spending and borrowing
in the second half of 2016 and the services sector saw good
Last autumn the focus of market concern shifted to 2017 and
three Brexit-related risks – from higher inflation hitting
consumer spending, the effects of uncertainty on business
investment and, in March, the triggering of Article 50.
These risks remain, but the scale of the threat they pose has
The UK's most venerable independent economic forecaster, the
National Institute of Economic and Social Research (NIESR),
forecasts that UK activity will slow only marginally, from 2.0% in
2016 to 1.7% in 2017, with growth then picking up to 1.9% in 2018
and 2.1% in 2019.
In the National Institute's forecasts Brexit triggers the
long-awaited rebalancing of growth in the UK economy from
consumption to exports. A weaker pound makes exports more
competitive and imports more costly. The result is a marked
shrinkage of the trade gap with the current account balance
narrowing to the lowest level in 20 years by 2018. Brexit,
ironically, could be a catalyst for making the UK economy more, not
The Bank of England expects there to be no slowdown in UK growth
this year, with the economy growing by 2.0%, followed by 1.6% in
2017 and 1.8% in 2018. The Bank sees consumers bolstering spending
power this year by saving less and borrowing more.
UK economy will certainly not get through Brexit scot free. The
Bank and the National Institute expect UK growth to be weaker over
the next three years than was widely expected ahead of the
referendum. The Bank and the Institute see an average UK growth
rate around the 1.8% mark for each of the next three years. That
compares with market expectations of average growth of 2.1% in
But this is a modest derating of medium term growth compared to
what many feared. Two of the UK's leading economic forecasters
now think the period which starts with the triggering of Article 50
and ends with the UK's departure from the EU will be one of
To all of this one might say that if post-referendum forecasts
for UK growth were so wrong why should we place so much weight on
these forecasts. Maybe they are too rosy, just as last summer's
forecasts were too pessimistic.
It is a fair point. But three factors support a more optimistic
interpretation of the effects of Brexit than seven months ago.
First, the actual performance of the UK since the vote and has
been solid. The knowledge that the UK is leaving the EU has not
induced a Lehman-style deterioration in confidence.
Second, financial conditions remain benign. There has been no
big hit to financial markets, credit conditions are favourable and,
in a sign of confidence about future growth, investors have been
Third, the global economy, and therefore demand for British
exports, is in better shape than it was last summer. Euro area
growth accelerated into the end of the year and in January business
confidence in the region hit a six year high. The US Federal
Reserve is sufficiently confident about America's recovery to
signal that US rates will rise further this year.
None of this is to diminish the historic nature of Britain's
departure from the EU, nor the risks and uncertainties ahead. But,
seven months on from the referendum, fears that Brexit will lead to
a collapse in Britain's growth rate have eased.
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