Yael Selfin, Chief Economist at KPMG UK, comments on today’s Q2 GDP figures
“The revised GDP figures released today paint a different picture of the UK economy. Consumer spending appears to have been stronger in the first half of 2018 than earlier estimates, financed by a dip into savings and rising debt. This throws into doubt the sustainability of such spending as interest rates rise and wage growth remains subdued.
“The revised figures showed investment fell in the second quarter, as Brexit induced uncertainties caused companies to postpone their plans. While we expect investment to pick up once the uncertainties around Brexit are lifted, some investment plans may not be resumed, which could have a lasting impact on the UK economy.
“The slightly weaker revised figures for the first quarter caused our forecast for UK GDP growth to be slightly lower at 1.2% for 2018 but remains unchanged at 1.4% for 2019 if a relatively friction-free Brexit and transition deal are reached with the EU. This will mark the lowest rate of growth since 2008 and 2009. However, if a disorderly Brexit were to occur, we predict a rapid slowing of growth to 0.6% in 2019 and 0.4% in 2020.
“Uncertainties and risks around Brexit are likely to make the Bank of England particularly cautious during the critical months ahead. We expected a pause before interest rates are raised by 0.25% in November 2019 to 1%. If Brexit negotiations fail, we expect rates to be cut to at least 0.25%, along with additional measures toease any significant pressure on the banking sector.
“The Chancellor will have limited flexibility in his Autumn Budget next month if he wants to keep to his target and not rock the boat on tax reform until at least Brexit terms are clearer. However, he may be tempted to look at taxes on the online sector and may wish to increase tax relief for innovation and R&D in support of the government’s Industrial Strategy. The challenges ahead call for a focus on improving the UK’s long term productivity and inclusiveness, while helping shield the economy in the short term from Brexit related disruption.”
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