With the approaching Brexit deadline and uncertain nature of the possible outcomes of the Brexit negotiations, economists are looking at the effects that the UK’s exit from the EU will have on a macroeconomic level for the country. There have been two major negative effects caused by Brexit thus far. The first is the higher inflation rate due to the weakening of the sterling which in turn is squeezing consumer power. The second is the weight of uncertainty on business sentiment.
So far, the first quarter figures for the UK were disappointing, as economic growth slowed to the weakest pace in over five years. Inflation is predicted to peak at just under 3% by the beginning of next year, but will start to moderate afterwards resulting with an average inflation of 2% for the remaining two years (1). Because UK economic growth slowed in 2017 with the quick increase in inflation, household spending power was greatly restricted.
In terms of retail sales, the first quarter saw a sharp fall in retail sales volumes due to high inflation and pressure on households’ purchasing power. However, current retail sales figures predict a return to higher volume in the coming months. The service sector growth is predicted to remain modest but positive, providing support to the construction sector growth that experienced a large set back due to the weakness fo commercial property investment. Additionally the housing market experienced some changes as the an increasing number of UK regions saw a decline in house prices even though there continues to be a housing shortage.
Even though the UK GDP expanded by only 0.1 percent during the first quarter of 2018, the UK GDP is projected to remain modest around 1.5% in 2018 and 1.65 in 2019 due to the combined effects of subdued real consumer spending growth lag in business investment from the uncertainty relating to the outcome of Brexit (2). However, the general strong global presence and Eurozone economies, along with the competitive value of the pound, are projected to boost exports for the UK and thus offer some support to the UK GDP growth. The UK GDP slow in growth in 2018 can best be explained by the risk of confidence and investment from businesses due to Brexit while the consumers continue to be constrained by the weak growth in wage (3). The levels of this consumer debt to the GDP still remain below pre-crisis levels, however they have seen an increase as banks pull back from unsecured lending.
Several economic indicators can be attributed to the uncertainty of the Brexit negotiation outcome. Consumer confidence continued to decline in April although unemployment decreased despite the bleak view for employment growth, both of which could possibly be the result of Brexit and increase in cost pressures from the rise in import costs. There was a slight pick up in 2017 in the growth in average earnings, however it is seen to be loosing momentum due to the rise in inflation which in turn is causing real wages to drop.
It is generally thought that the strength of the global recovery will partially offset the Brexit-related economic damages in the coming months. The global growth has proved to be stronger while the weaker euro/sterling exchange rate has increased UK exports. In general, small and medium sized manufactures are more optimistic about export prospects (4).
Overall, businesses are worried about the outcome of the Brexit negotiations due to the high amount of current uncertainty. Investment growth decreased markedly last year and is expected to remain weak until some clarity is gained in the UK exit process and outcome. In addition to investment, two-thirds of business reported a large impact on the recruitment and retention of entry-level staff. In terms of contingency plans for post Brexit, over one third of firms report having a contingency plan in place and a quarter are predicted to produce one in the future (5).
1 https://home.kpmg.com/uk/en/home/insights/2017/05/uk-economic-outlook-update.html
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