While Brexit may be casting a shadow over the economy, it’s not the only thing at play.
The ongoing uncertainty about the form that Brexit may – or may not – take continues to cast a shadow on the outlook for the economy. Delays in investment, while business has waited for certainty, hasn’t helped the economy’s productivity and that limits the speed at which it can grow. While we wait for news on the final negotiations with the European Union, financial markets are wobbly and as a buffer have already priced in higher interest rates. But Brexit isn’t the only thing at play. Global economic conditions are weakening too – particularly in Europe and China and that has an effect on the UK’s potential to grow.
It’s easy to fall into gloom mode, but there are still aspects of the economy to be happy about. The labour market is in strong shape – with employment at the highest levels since 1971 and wages are growing at their fastest pace in a decade. Interest rates are low, inflation is modest and finance is available. Even though the next move in interest rates will be up, these moves are still likely to be small and slow. Forecasters think that interest rates will reach 1.5% by Q4 2019.
There are significant risks to the economy if Britain leaves the EU without a deal and these can’t be ignored, but after the government lost the parliamentary vote, it seems that it’s even less likely that no deal will be the outcome. In the short-term, uncertainty is affecting growth – the Bank of England has revised down its expectation for growth in Q4 2018 and Q1 2019 to just 0.1%. But once the terms of the deal are known, business investment will be able to move ahead giving a boost to growth, albeit with a delay.
Independent economic forecasts are in relatively close agreement about the pace of economic growth this year – but based on the assumption that the UK will leave with a deal that allows a transition period to adjust and agree new trading arrangements outside of the union. The average view is that the economy will continue at a modest and unstartling pace. We are used to that and would welcome it in exchange for the shock of an unplanned exit from the EU.