UK: Growth undermined by uncertainty

CHART OF THE WEEK

Chancellor of the Exchequer Philip Hammond has presented the Treasury’s latest macroeconomic growth outlook in his spring budget statement. From 1.7% in 2017, GDP is expected to decline to 1.5% in 2018 and 1.3% in 2019. The data available so far for 2018 seem consistent with a slowdown. The monthly estimate of growth by the National Institute of Economic and Social Research (NIESR) has indeed deteriorated soon after the recovery seen in the second half of last year.

 

 

OUR ANALYSIS

The effects of the UK’s vote to leave the EU are long-lasting and have led to a downturn in growth relative to the pace of over 2.0% that prevailed before June 2016.

The fall in Sterling has resulted in significantly higher import prices and pushed inflation to high levels (+2.7% in January). Even if latest figures are better oriented, wages have failed to gain pace and thus put spending under pressure – as retail sales figures show. Sterling has stabilised over the last 12 months (the real effective exchange rate has risen 2.6% year-on-year), which should calm inflation, but spending is unlikely to make a strong recovery as household savings rates have significantly declined.

Talks between the UK and the EU will now focus on shaping trade relations for when Brexit becomes reality. The outcome of the talks will have significant effects on the UK’s attractivity and on investment levels. Until 2015, corporate investment was growing at an annual rate of 5%, but it currently stands at just 2%, as companies opt to wait and see.

The uncertainty surrounding the talks is likely to be a long-term drag on UK growth, depriving it of the benefits of the global upturn.

 

 

The opinion expressed above is dated 16 March 2018 and is liable to change.

This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.


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Julien-Pierre Nouen

Directeur des études économiques et de la gestion diversifiée