July 19, 2016
UK growth had already eased from around 3 percent in 2014 to around 2 percent before the EU referendum due primarily to slower global growth, but the Brexit vote to leave the EU is likely to lead to a significant further slowdown. UK GDP growth is forecast to decelerate to around 1.6 percent in 2016 and 0.6 percent in 2017 according to PwC’s main scenario in its latest UK Economic Outlook report. Quarter-on-quarter GDP growth could fall to close to zero in late 2016 and early 2017 in this main scenario, but is then projected to recover gradually later in 2017 as the immediate post-referendum shock starts to fade. The UK would avoid recession in this scenario, although the report notes that uncertainties around this view are significant, with alternative scenarios showing GDP growth in 2017 of anywhere between +1.5 percent and -1 percent. But even this latter relatively pessimistic scenario would not be a severe recession of the kind seen in the early 1980s or in 2008-9.
The main reason for the slowdown is projected to be a decline in business investment, particularly from overseas in areas such as commercial property. Construction companies and capital goods manufacturers could also be relatively exposed to this kind of short-term cyclical slowdown.
Consumer spending growth is projected to hold up better, but could still slow from previous strong rates, dropping to around 1.3 percent in 2017 in PwC’s main scenario. This reflects the impact of a weaker pound in pushing up import prices and squeezing the real spending power of households, as well as lower consumer confidence levels and slower jobs growth. The weaker pound should also boost net exports, however, which should move from being a drag on overall UK GDP growth in 2015 to a positive contributor in 2017.
John Hawksworth, chief economist at PwC, commented: “UK economic growth held up reasonably well in the run-up to the referendum and, while the vote to leave the EU was a major shock, we would expect the relatively flexible UK economy to adapt to this in the long term. But growth is likely to be significantly slower in the short term due to the political and economic uncertainty following the Brexit vote, which is likely to cause some business investment to be scaled down or deferred. The Bank of England has already taken action to steady the ship, however, and we do not expect the post-Brexit economic downturn to be anything like as severe as that following the global financial crisis of 2008-9 or indeed the deep recession of the early 1980s. Our main scenario projections suggests that the UK should narrowly avoid a recession over the next year, although we recognise that risks are weighted somewhat to the downside at present.
“Businesses need to hold their nerve through this unsettled period, take stock of the potential impact of Brexit on their markets and operations, and make contingency plans for alternative outcomes. They should also consider the longer term upside possibilities stemming from Brexit, particularly in terms of building closer trade relationships with relatively fast growing economies like China and India to offset any decline in trade with the EU27.”