According to KPMG UK’s quarterly Economic Outlook Report: the UK economy is set for modest growth if a positive Brexit deal can be reached with the EU. KPMG predicts that UK GDP will grow by 1.3% in 2018 and 1.4% in 2019. This will mark the lowest rate of growth since 2008 and 2009. These figures are based on an assumption that the UK government will achieve a relatively friction-free Brexit and transition deal. If a disorderly Brexit were to occur, KPMG predicts a rapid slowing of growth to 0.6% in 2019 and 0.4% in 2020.
The report also finds that Brexit uncertainty is not the only factor inhibiting growth. Poor productivity continues to be a drag, and businesses are finding it increasingly difficult to recruit because of dwindling spare capacity. The manufacturing sector is still seeing low export levels despite the weakness of the pound, and retailers in particular continue to face a challenging environment. In addition, despite high employment levels, the reports predicts workers can expect pay growth of around 3%.
Explaining the report Yael Selfin, Chief Economist at KPMG UK, commented:
“Brexit will have a lasting effect on the UK, but economically it isn’t the only game in town. Issues such as improving productivity, reducing regional economic disparity, and ensuring that UK workers have the skills to meet employers’ needs should also be at the forefront of the Chancellor’s mind. Bringing productivity growth back to pre-2008 levels alone could see the British economy grow by more than 2%.
“If negotiations between the EU and UK result in a relatively friction-free agreement, then growth is likely to remain around 1.4% in the medium term as a result of relatively weak productivity. If we see a disorderly Brexit, growth will obviously slow more dramatically. If negotiations end well, the MPC are likely to raise interest rates to 1% at the tail end of 2019. If no deal is reached, the MPC will need to use interest rates to soften the economic impact.”
Monetary and fiscal policies
Uncertainty and risks around Brexit are likely to make the MPC cautious during the critical months ahead. KPMG predicts that rates will stay on hold until November 2019, with another 0.25 percentage point rise scheduled if Brexit negotiations proceed smoothly. Interest rates are likely be cut to at least 0.25% if negotiations are not successful, with additional measures to be announced by the BoE to ease any significant pressure on the banking sector.
UK housing market
The UK housing market will see moderate growth as prices start to rebalance across regions. KPMG UK predicts that house price growth will slow from 4.5% in 2017 to 2.6% in 2018, 2.0% in 2019, and 1.6% in 2020. High price levels, uncertainty around the future economic outlook, and rising interest rates are expected to take their toll in London and the South East especially. House prices in the capital are expected to drop by 0.7% in 2019.
Across the UK, the housing market strongest growth is expected in regions with lower pressures on valuations, such as Scotland, where KPMG expects to see growth of 4.9% in 2018. In comparison, the housing market in London will continue to struggle, with gradual falls in house prices until 2021.
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About the research
The forecasts were produced by the KPMG macroeconomics team using a suite of external and in-house models capturing the main inter-relationships in the UK economy. As with all forecasts, these are subject to considerable uncertainty and the outturn may differ significantly. For more details, please see the full “Economic Outlook Report” at: https://assets.kpmg.com/content/dam/kpmg/uk/pdf/2018/09/economic-outlook-special report-september.pdf
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