The June 2016 vote for Brexit has slowed down the UK economy in the first half of 2017. GDP rose 0.2% in the first quarter and 0.3% in the second quarter, down from 0.5% and 0.7% in the final two-quarters of last year, Oliver Mangan.
The growth rate in the UK has slipped below that of the US and the eurozone; they grew at double the rate of the UK in the first half of this year.
The performance of the UK is all the more disappointing, given the sharp fall of sterling, which should have provided a fillip to external trade.
The economy should have also benefitted from the further loosening of monetary policy a year ago.
The external environment has also turned more favourable, with the strengthening of the global economy this year, most noticeably the UK’s main export market, the eurozone.
However, these positive factors have been overwhelmed by the negative consequences t of the vote for Brexit.
The resulting, sharp fall in sterling has led to a big rise in import prices and thus a marked acceleration in retail price inflation. Meantime, wage growth has slowed and real incomes are now falling, as prices are rising faster than earnings.
Employment growth has also slowed. As a result, there has been a slowdown in consumer spending, which has been the cornerstone of growth in the UK in recent years.
Last week, the Bank of England’s governor Mark Carney observed that businesses have invested much less aggressively since the referendum. The uncertainty around Brexit is weighing on investment activity, while there has also been a slowdown in the UK property market. Consumer confidence has also fallen appreciably.
Nonetheless, survey data suggests that the UK should see moderate growth over the second half of the year.
The Bank of England also expects the UK economy to grow at a moderate pace, because a weak sterling and stronger external demand should have a positive impact on trade.
The bank is forecasting that the UK economy will grow by 1.6% next year and 1.8% in 2019.
However, the bank’s macro forecasts are based on households and businesses continuing to act on the expectation of a “smooth” Brexit that does not cause a material disruption to the UK economy and its trade with the EU.
As expected, last week’s meeting of the Bank of England’s Monetary Policy Committee concluded with no changes to interest-rate policy.
The decision to leave rates unchanged, though, was not unanimous. Two of the eight Monetary Policy Committee members wanted to hike the bank rate from 0.25% to 0.5%.
Sterling weakened after the meeting, falling by 1% on the exchanges. This was reflected in EUR/GBP rising above 90p and GBP/USD moving down near $1.31.
The reaction was somewhat surprising, given that the bank stated that rates may need to rise by a “somewhat greater extent” in the next couple of years than markets are expecting.
The extent of any UK rate hikes is likely be very much dependent on how the negotiations with the EU on Brexit evolve, as this will impact economic activity.
A ‘soft’ Brexit could see rates rise by more than the 50 basis points currently priced in by markets over the next three years.
On the other hand, rate increases would seem unlikely, if a ‘hard’ Brexit unfolds, given all the risks this would pose for the economy.
Oliver Mangan is chief economist with AIB
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