NIESR: Prospects for the UK Economy
The UK economy has lost momentum since our last forecast because Brexit-related uncertainty has intensified and also because global economic growth has slowed. As a result, we have revised lower our forecast for UK GDP for 2019 from 1.9 per cent to 1.5 per cent. GDP growth is likely to be driven by domestic demand and consumer spending more specifically. With global growth softening over the forecast horizon and the tailwinds from the weaker exchange rate fading, we do not expect net trade to make a material positive contribution to UK economic growth. The risk to our GDP growth forecast is tilted materially to the downside because of Brexit.
- The UK’s future relationship with the European Union (EU) remains undecided even though the Article 50 exit date is less than two months away. Brexit uncertainty has intensified since our last forecast and is now evident in various indicators.
- Our main forecast is conditional on a ‘soft’ Brexit scenario. Under this scenario, GDP growth stabilises at around 1.5 per cent this year before recovering to 1.7 per cent in 2020. CPI inflation eases to the target level of 2 per cent over this period.
- We expect the Bank of England to raise Bank Rate by 25 basis points in August. We also expect the Chancellor to spend more than the latest OBR forecast. That, together with the reclassification of student loans in public deficit data, will mean that the Chancellor is set to breach the fiscal mandate.
- There is a chance that the UK exits the EU without a deal at the end of March. Policymakers will have more room to inject stimulus if inflation expectations remain anchored.
This slowdown must be placed in the context of record levels of employment, rising wage growth and public finance data that continues to surprise to the upside. We note that annual unit labour cost growth has remained stable at around 2.8 per cent in the third quarter of last year. CPI inflation however, is likely to fall below the target in the short run because of lower oil prices.
Compared with our November forecast, we now expect the next 25 basis point Bank Rate increase to be delayed until August this year. Thereafter, we envisage a similar 25 basis point rate increase every six months until end-2020 when Bank Rate would reach 1.5 per cent. In the event that the UK slips into a no-deal Brexit, the MPC should lower Bank Rate if inflation expectations remain anchored.
The Chancellor announced higher public spending in the 2018 Budget. In our view, the Chancellor will have to go further to better cater to the needs of an ageing population and to maintain the quality of public services. That, together with the new and more realistic treatment of student loans in the fiscal deficit measure implies a breach of the fiscal mandate on our forecasts.
There is still a chance that the UK exits the EU at the end of March without a deal. Policymakers will respond to that scenario by activating contingency plans and inject stimulus into the economy if possible. We present two alternative scenarios, one where medium-term inflation expectations and wage growth remain stable and the other where expectations are dislodged and the labour market displays real wage resistance. We show that policymakers will have more room to inject stimulus and stabilise short term economic growth if inflation expectations and wages remain anchored.
Notes for editors:
The full forecast for the UK economy will be published in the National Institute Economic Review no. 247 on Wednesday 6 February. Details of NIESR’s previous UK economic forecast can be found here.
For a full copy of the UK economic forecast or to arrange interviews, please contact the NIESR Press Office: Paola Buonadonna on 020 7654 1923 / email@example.com
For technical questions related to the forecast, please contact:
- Garry Young on +(44) 0207 6541916 firstname.lastname@example.org
- Amit Kara on +44 (0)20 7654 1943 / email@example.com
The National Institute Economic Review is the quarterly journal of the National Institute of Economic and Social Research (NIESR). Published in February, May, August and November, it is available from Sage Publications Ltd (http://ner.sagepub.com./) at firstname.lastname@example.org.
Latest News from
IPPR - May and Johnson’s Brexit Deals compared: A harder deal, less alignment and more barriers to trade18/10/2019 15:15:00
IPPR analysis finds Johnson’s deal points to harder Brexit than May’s
IFG - Government cannot afford to support business in a no-deal Brexit17/10/2019 13:35:00
If the UK leaves the EU without a deal, the government will not be able to support all affected industries, argues a new report by the Institute for Government. Against a backdrop of steeply deteriorating public finances, the government will be forced into impossible choices about which businesses and industries to save. Without clear principles, the fight over subsidies will be swamped by politics.
NIESR monthly CPI Tracker: Inflation unchanged after fuel price falls17/10/2019 13:10:00
According to figures released yesterday by the ONS, consumer price index inflation remained unchanged at 1.7 per cent in the year to September 2019.
Civitas - Social democracy faces extinction without a new high-growth economic strategy – John Mills17/10/2019 12:35:00
The centre-left faces ‘extinction’ unless it can break free of neoliberal economic dogma and find a way to credibly deliver significantly higher rates of growth in the years ahead, a new book by the businessman and Labour donor John Mills warns.
IFG - No-deal Brexit would be high-stakes gamble with the Union17/10/2019 11:35:00
A no-deal Brexit would be highly controversial in all three devolved nations and increase risks to the Union itself, argues a new report by the Institute for Government.
The King's Fund responds to the Care Quality Commission's State of care report17/10/2019 10:35:00
Sally Warren, Director of Policy at The King’s Fund commented on the new State of care report from the Care Quality Commission (CQC)
Civitas - Muslims targeted for supporting counter-extremism initiatives – new report17/10/2019 09:35:00
Liberal Muslims working on counter-terrorism and counter-extremism are routinely subjected to abuse and intimidation, a new Civitas study shows.
NIESR Monthly Wage Tracker: Labour market weathering an increasingly difficult economic environment16/10/2019 11:25:00
Labour market weathering an increasingly difficult economic environment.
JRF - Politicians need to step up and deliver for people on low incomes15/10/2019 14:35:00
The Joseph Rowntree Foundation has called for real action in the November budget, as the Government presented the first Queen’s Speech in over two years, which JRF says failed to address the concerns of low-income voters