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UK economy outlookBack

InflationClear information about the impact of Brexit is expected to start appearing in August, at the moment the majority of the official economic figures partially reflect the pre-referendum situation. Uncertainty is forecasted in the short term, but it is still very difficult to state what the long term consequences of Brexit will be. Implications, in fact, are likely to vary according to what agreement will renegotiate the UK relationship with the EU. At present, much depends on companies’ willingness to invest and households’ readiness to commit to big purchases, such as cars.

UK GDP Growth Rate

The economy of the UK expanded 0.4% in the first quarter of 2016, according to the Office for National Statistics. This was in line with preliminary estimates, but lower than the 0.7% growth of the final quarter of 2015.

Business investment shrank more than expected and exports declined the most in six quarters ahead of the Brexit vote. The Services sector is the most important and accounts for 79% of total GDP.

Between Quarter 1 2015 and Quarter 1 2016, GDP in volume terms increased by 2.0%, revised down 0.1 percentage points from the previously published estimate. Estimates for Q2 and Q3 have been reduced to respectively 0.4% and 0.3%, down from the pre referendum forecast of 0.6% for both quarters.

A short-term slowdown in export growth, predominantly a result of weaker demand from emerging markets, might be offset by an acceleration of domestic demand helped by falling oil prices and loosening of fiscal policy which help will bolster consumer spending.  Growth is projected to accelerate again in 2017 as the improving external environment strengthens export demand.

Interest Rates

The Bank of England has held the UK’s main interest rate at 0.5% despite speculation that it would cut rates, especially, after Bank of England Governor Mark Carney announced that “some monetary policy easing” would be required.

The Monetary Policy Committee has voted 8-1 to leave rates unchanged, however this does not rule out further economic measures at a later stage if the Bank of England determines the economy requires stimulation to ride out any impact that Brexit might have.

Unemployment Rate

British jobless rate came in at 5.1% in the three months to January of 2016. This has been the same for the previous two periods, maintaining a decade-low rate, which is extremely encouraging to see. It should be noted that pay growth including bonus went up 2.1%, and excluding bonus went up by 2.2%. It is forecasted that unemployment will continue to decrease, and is expected to end 2016 with at 4.40%. The unemployment count for the 3 months to the end of January was down to 1.68 million, 28,000 fewer than for August to October in 2015.

Inflation rate

UK Inflation Rate remained unchanged at 0.3% in May, according to the latest figures from the Office for National Statistics (ONS). The main upward pressure came from transport costs, which rose by 0.9% between April and May, but it was offset by clothing and footwear prices, which dropped 0.2% between April and May, while food and drink prices fell 0.4%.

The Bank of England has an inflation target of 2%, but has failed to meet this for more than two years. However, economists and analysts are already warning that the combination of weak sterling rate cuts and more quantitative easing could cause a rise in inflation.

Uncertainty over Brexit negotiations are likely to push the sterling lower resulting in a significant inflation increase in the next three years. A few major retailers such as John Lewis have already warned that consumers could face rising prices next year.

Currency trends

The value of the pound will play a crucial role in the post Brexit UK situation. A weak sterling will push up the cost of imports making consumer goods and raw materials more expensive. However, it might help UK exports, as they will be cheaper to buy, and help manufactures offset their increased cost base. The Pound reached its highest level against the Euro in November 2015, but since the beginning of December it started to decline (1GBP=1.35 EUR).

New car market

The new car market is a good barometer of the economic health of a country. Car registrations in the first half of 2016 have been up 3.2%, a sign of both consumers and business confidence to spend and invest. However, the market stabilised in June (-0.8%), particularly in the retail sector. At this stage it is difficult to assess if this is a short term slowdown caused by unease due to Brexit, or if it is a longer term correction of the market following a long period of continuous growth.

Posted by Sue Robinson on 15/07/2016