UK economic growth held up better than expected immediately after the Brexit vote, particularly as regards consumer spending and services. For 2016 as a whole, growth now looks likely to average around 2%.
In our main scenario, we project UK growth to slow to around 1.2% in 2017 due to the drag on business investment from increased political and economic uncertainty following the ‘Brexit’ vote. But we don’t expect the UK to suffer a recession next year.
The main reason for the slowdown will be a decline in business investment, driven in particular by uncertainty about the UK’s future trading relationships with the EU in the longer term.
Consumer spending growth is projected to hold up better, but will still slow from previous strong rates, dropping to around 2% in 2017 in our main scenario. This reflects the impact of a weaker pound in pushing up import prices and squeezing the real spending power of households, as inflation rises to well above its 2% target rate by the end of 2017.
Service sector growth will slow but should remain positive in 2017, but construction will suffer from lower investment levels. Capital goods manufacturers will suffer for the same reason, but some manufacturing exporters will benefit from the weaker pound.
Slower growth will mean higher public borrowing over the next few years. But we think the Chancellor should still have room to boost public investment over the next few years while still keeping the public finances on a sustainable path in the longer term.
Looking further ahead UK trade prospects after Brexit will depend on business reorienting its efforts towards faster growing non-EU markets, notably in the tradable services area where the UK has relative strengths. The proportion of UK trade going to the EU27 countries could fall from around 44% now to only around 30-35% by 2030. Free trade deals may help this strategic shift in the longer term, but UK businesses should not wait for these before taking action to explore new markets beyond the EU.
UK economic growth held steady at just over 2% in the year to Q3 2016, with no immediate marked deceleration after the ‘Brexit’ vote.
In our main scenario, we now project UK growth to slow from around 2% in 2016 to around 1.2% in 2017 due to the increased political and economic uncertainty following the Brexit vote. The UK would avoid recession in this scenario, although risks to growth are still weighted somewhat to the downside. Businesses need to make contingency plans for these alternative outcomes.
We project that London will remain the fastest growing region but its pace of expansion could slow significantly from around 3% in 2015 to around 1.7% in 2017. Other regions will see more modest growth in 2017, closer to 1%, but we do not predict negative growth in any region in 2017 in our main scenario.
Have a look at our interactive data tool below to explore output and employment growth trends and prospects for your region.
In our main scenario we project that public borrowing will, in the absence of policy changes, be persistently higher than the OBR forecast back in March before the Brexit vote.
In particular, we project a continuing budget deficit of around £67 billion this year, falling to around £18 billion in 2019/20 on unchanged policies rather than a £10 billion budget surplus in that year. In total, we project a cumulative public borrowing overshoot of over £100 billion by 2020/21 compared to the OBR’s March forecasts.
This would, however, still leave the Chancellor with a current budget surplus (excluding net investment) in 2019/20 and it seems likely that he will want to add to planned public investment in priority areas such as housing, transport infrastructure and NHS capital budgets.
Assuming an additional £20 billion (c. 1% of GDP) of net public investment spread over the period between 2017/18 and 2019/20, we estimate that the public debt to GDP ratio would still be on a downward trend from 2018/19 onwards, as well as retaining a current budget surplus of around £16 billion in 2019/20. This would meet a revised, more flexible set of fiscal rules more similar to those initially adopted by George Osborne in 2010, as opposed to his later more ambitious budget surplus target.
While the Chancellor may boost public investment, he does not have the money for large net tax cuts and is likely to continue to bear down on non-investment spending by both central and local government.
World trade growth has slowed relative to global GDP growth since the financial crisis. This slowdown has been exacerbated recently by weaker growth in emerging markets and the commodity trade cycle.
UK export performance since 2007 appears to have been stronger outside the EU than within the Single Market. The UK also has a strong comparative advantage in services trade, which is growing more strongly globally than trade in goods.
Medium-term growth prospects remain strong in key emerging market regions, including Asia, Africa and the Middle East. That suggests that the recent downturn in trade growth outside the developed economies should prove temporary, and that UK export growth to markets outside the EU should soon resume momentum, perhaps rising to around 65-70% of total UK exports by 2030.
The key policy priorities for improving UK trade prospects after Brexit should be: securing the best possible access to the Single Market; a programme of trade promotion in non-EU markets; supply-side reform; and active engagement with other major international institutions – including the World Trade Organisation.