UK Economic Outlook

Prospects for the economy, the productivity challenge and migration after Brexit

November 2017

Summary

In our main scenario, we project UK growth to slow from 1.8% in 2016 to around 1.5% in 2017 and 1.4% in 2018.

This reflects slower consumer spending growth, offset by some rise in UK exports and public investment. But risks to growth are weighted to the downside due to Brexit.

Looking beyond Brexit, the key challenge for the government is to boost UK productivity growth, which has been the second slowest in the G7 on average since 2010. This will require increased public and private investment in housing, transport infrastructure, skills and innovation, as well as measures to support growth across all regions of the UK.

Migration will also be an important element in post-Brexit policy. We estimate that an alternative ONS population scenario in which future net migration to the UK from the EU27 halves could reduce UK GDP in 2030 by around 1.1%. But the negative impact on average UK income levels would be much less (c.0.2% in 2030).

Some sectors (e.g. food manufacturing, hotels and restaurants, warehousing and construction) and regions (London) are particularly reliant on EU27 workers, so unduly restricting future migration after Brexit could have disproportionately large negative effects in those areas. 


Slower consumer spending growth dragging down UK GDP growth
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UK economic prospects 

In our main scenario, we project UK growth to slow to 1.5% in 2017 and 1.4% in 2018. The UK would avoid recession in this scenario, although risks to growth are still weighted to the downside given the uncertainties associated with Brexit.

A key factor behind the overall slowdown is a moderation in consumer spending growth to around 1.6% in 2017 and 1.1% in 2018. This reflects a squeeze on household spending power from higher inflation and sluggish wage growth.

Wage growth continues to be low despite the lowest unemployment rate since 1975 and we expect only a modest increase in earnings growth to 2.5% on average in 2018, as compared to 2.7% average inflation in that year.

Uncertainty surrounding Brexit is also holding back business investment in the UK, which would otherwise be expected to be picking up strongly as global growth has been robust and finance remains relatively cheap.

Manufacturing growth has been reasonably strong in recent months on the back of a recovering global economy. Services growth has moderated but remains positive, but construction has been weaker. We expect these broad sectoral trends to continue into 2018.

London has grown faster on average than other UK regions since 2010, but is relatively exposed to Brexit and we expect its growth rate to fall back to close to the UK average in 2017-18.

After raising interest rates in November, the Bank of England will probably keep rates on hold over the coming months as it waits for more information on growth, inflation and the Brexit negotiations.  

The twin puzzles – why has UK trade and productivity performance been disappointing?

Since the Global Financial Crisis, the UK has been one of the better performers in the G7 in terms of overall GDP growth, buoyed by strong jobs growth. But export and productivity performance has been less impressive – at or close to the bottom of the G7 league table on average since 2010.
 

UK has had second slowest productivity growth in G7 since 2010
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Our analysis shows that there has been a general slowdown in productivity growth across the major industrialised economies since the crisis. This reflects a combination of long-term structural factors, the unintended consequences of policies designed to cushion the impact of the financial crisis (including monetary policy), and a lack of investment in both human and physical capital.

In the case of the UK, however, the relatively poor performance of the financial sector and property-related activities have also exerted a further drag on productivity growth since the crisis.

Disappointing UK export performance can also be attributed to a similar pattern in key services industries including financial services. Services exports boosted UK trade performance before the financial crisis, but have been relatively lacklustre since.

There is no easy quick fix to address these issues, and a devalued exchange rate has not provided a significant boost to either trade performance or productivity since 2009. A long-term modern industrial strategy is needed that focuses on improving access to skills, developing better transport networks, providing stronger incentives to invest and innovate, and creating the conditions for more balanced regional growth.

How might lower EU migration affect the UK economy after Brexit?

EU migrants have played an increasingly important role in the UK economy since 2004, with particularly large impacts on London and certain sectors such as food manufacturing, hotels and restaurants, warehousing and construction.

As an illustration, we have modelled the effect of a recently published ONS alternative population scenario involving a 50% reduction in future EU migration. We estimate that such a scenario could reduce the level of UK GDP in 2030 by around 1.1%. While not a prediction of what will actually happen, it is an illustration of the potential economic impact of net migration from the EU being lower, whether driven by policy changes or other factors such as exchange rates or relative economic growth rates.

However, a better measure might be the impact on average GDP per capita in 2030, which we estimate to be reduced by around 0.2%, or around £60 per person at 2017 GDP values, in this scenario.

In the long run, efforts could be made to fill skill gaps arising from lower EU migration through enhanced training of UK nationals and automation. But, realistically, such alternatives are unlikely to make up for any large reduction in EU migrant workers over the next 5-10 years.

Please use our data explorer below to see how migration from the EU and elsewhere has impacted your region.

 

 

Select a region to explore migration trends further
    Source: ONS

    Notes: For new migrant GP registrations,
    UK figure does not include Scotland data.

    For Live births to Non-UK born mothers,
    UK figure does not include Northern Ireland data.
    Non-UK born as % of
    total population
    25%
    0%
    % of total employment
    (2013-15 average)
    12.5%
    0%
    New migrant GP registrations
    (% of total population)
    3%
    0%
    Live births to non-UK born mothers
    (% of all live births)
    60%
    0%
    Net long term international migration flows to UK regions. Year to mid-year (% of total population in region/country)

     

     

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    Contact us

    John Hawksworth
    Chief UK Economist
    Tel: +44 (0)20 7213 1650
    Email

    Andrew Sentance
    Senior Economic Adviser
    Tel: +44 (0)20 7213 2068
    Email

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