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Britain at a crossroads

Britain at a crossroads

The UK’s economy is nearing an important milestone. Just over three years since the referendum, we are getting increasingly close to Brexit.

Executive summary

  • With the new government in Whitehall resolved to leave the EU by 31 October, the outlook for the UK economy is increasingly bipolar for the year ahead.
  • A Brexit deal will provide a boost to the economy, with GDP growth expected to rise to 1.5% in 2020, as investment recovers some ground. However, a slowing global economy, and limited spare capacity domestically, will constrain the upside to UK economic growth.
  • Uncertainties about the UK’s future trading relationship with the EU are unlikely to be resolved for several years following a deal in October. Some investments will continue to be delayed until a trade deal is agreed.
  • The pound could appreciate by 10-15% on news of a deal, which together with lower energy costs, will see inflation in check close to its 2% target. This will allow the Bank of England to keep the base interest rate at the current 0.75% until at least November 2020.
  • An exit from the EU without a deal on 31 October will result in a relatively shallow recession that lasts around four quarters, with GDP contracting by 1.5% in 2020 under our no-deal Brexit scenario.
  • Delays to goods traded across the border are expected to make the strongest dent on the UK’s business environment in the short term, while potential shortages of imported foodstuffs as well as medicines in the immediate term could negatively impact households’ sentiment.
  • Despite a further depreciation in the pound, by perhaps as much as 10%, and the resulting rise in inflation to 2.4% in 2020, the Bank of England is expected to lower the base interest rate to 0.1% shortly after the UK exits the EU with no deal.
  • While preparations are made for a no-deal, unforeseen issues will inevitably arise. It is the danger of the potential impact of these ’unknown unknowns’ that makes no-deal so risky for the economic health of the country.
  • A third scenario could take place if the government did not manage to achieve an exit by 31 October. That will open the door for another extension, and a delayed deal or no‑deal, pushing our deal and no-deal forecasts for the UK’s economy further into the future.
  • House prices in the UK should see improvements to growth across all regions by 2020 under a deal scenario, with Yorkshire experiencing the strongest rise followed by the North West. A no-deal will see falls in house prices of around 6% in 2020, with Northern Ireland bearing the heaviest impact on house prices. Falls in a no-deal scenario could be even larger, around 10-20%, based on historic market performance.
  • Latest data on the state of public finances point to shrinking headroom for the Chancellor with deteriorating economic forecasts and an additional £15.5bn spending announced in the 2019 Spending Review. Nevertheless, the Autumn Budget is promising to be an interesting ride according to our tax experts, whose advice is to ‘expect the unexpected’. Changes to corporation tax could potentially be most interesting, where a no-deal Brexit might usher in radical changes, including significant cuts to the headline rate of corporation tax, accompanied by increased investment incentives in relation to innovation.
Deal: GDP
1.4%
2018
1.3%
2019
1.5%
2020
No Deal: GDP
1.4%
2018
0.9%
2019
-1.5%
2020
Deal: Inflation vs interest rate (end-of-year)
Cloud
2.5%
0.75%
2018
1.9%
0.75%
2019
2.0%
1.0%
2020
No Deal: Inflation vs interest rate (end-of-year)
Cloud
2.5%
0.75%
2018
2.1%
0.1%
2019
2.4%
0.1%
2020
Deal: Unemployment rate
4.1%
2018
3.9%
2019
3.9%
2020
* These figures represent our central scenario under which the UK secures a transition agreement after Brexit and a relatively friction-free trade deal after that. Figures for GDP, consumer spending, investment and inflation represent % change on previous year. Figures for house prices are house price changes over the course of the year and interest rates are quoted at the end of the year deal after that. All figures represent annual averages, unless otherwise specified.
No Deal: Unemployment rate
4.1%
2018
4.0%
2019
4.8%
2020
* These figures represent our central scenario under which the UK secures a transition agreement after Brexit and a relatively friction-free trade deal after that. Figures for GDP, consumer spending, investment and inflation represent % change on previous year. Figures for house prices are house price changes over the course of the year and interest rates are quoted at the end of the year deal after that. All figures represent annual averages, unless otherwise specified.

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