Brexit will weigh heavily on UK growth, predominantly in H216 and H117 when uncertainty over the UK's future relationship with the EU is at its highest. We have revised down our real GDP growth forecasts for 2016 and 2017 to 1.4% and 0.2% respectively, from 1.8% and 2.2% previously.
The Bank of England (BoE) will ease monetary policy in light of the British vote to leave the EU on June 23, with an interest rate cut and resumption of quantitative now expected in H216. However, with interest rates already at record lows and inflation poised to rise on the back of pound depreciation, monetary stimulus will have little beneficial impact on the real economy.
While there remains considerable uncertainty as to the makeup and policy direction of the next UK government, we expect a relaxation of deficit reduction targets in light of a slowing economy.
In light of positive structural economic reforms undertaken by the government, coupled with flexible monetary and exchange rate policies, we remain bullish on the long-term economic prospects for the UK relative over the longer term.
Outgoing Prime Minister David Cameron is aiming to put UK politics into a holding pattern until October. By delaying the start of EU exit negotiations until his successor is in place this is aimed at preventing knee-jerk political reactions amid a very fractious political climate.
Major Forecast Changes.
We have revised down our real GDP growth forecast in 2016 and 2017 to 1.4% and 0.2%, from 1.8% and 2.2% previously.
We now forecast the current account deficit to narrow to 2.9% of GDP by 2018, from 4.1% previously.
We now forecast the first rate hike only in 2019, from late-2017 previously, and expect the BoE to resume quantitative easing (QE) by the end of this year.
We forecast the fiscal deficit to remain around 4.0% of GDP in 2016-2018, from a previous forecast for fairly aggressive consolidation.
Downside Risks To Medium-Term Growth: There are downside risks to our economic growth forecasts, particularly stemming from the impact of fiscal consolidation, persistent weakness in the eurozone economy, and ongoing headwinds facing global emerging markets.
|e/f = BMI estimate/forecast; Source: BMI/ONS|
|Real GDP growth, % y-o-y||2.9||2.3||1.4||0.2|
|Nominal GDP, USDbn||2,991.8||2,848.5||2,483.6||2,566.4|
|Consumer price inflation, % y-o-y, eop||0.5||0.2||1.0||2.8|
|Exchange rate GBP/USD, eop||0.64||0.68||0.77||0.75|
|Budget balance, % of GDP||-5.6||-4.4||-4.2||-4.0|
|Current account balance, % of GDP||-4.7||-5.4||-4.6||-3.6|
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