Economic forecasters say the lingering Brexit uncertainty could hamper the UK’s economic growth this year, while affecting the EU as well.
Kristian Rouz — The UK is facing the risk of an economic slowdown in the coming months due to the lack of clarity and elevated political tensions over Brexit, top analysts have warned. Experts say a no-deal Brexit could impact property prices and levels of investment, hindering overall business activity in Britain.
However, any projected outcome of the Brexit process is unlikely to provoke an economic recession, while the UK’s GDP growth rate is expected to outpace that of Germany — the EU’s economic powerhouse — this year.
According to estimates by the National Institute of Economic and Social Research (NIESR), the British economy will expand 1.9 per cent in 2019 if Prime Minister Theresa May is able to reach a consensus in parliament and strike a Brexit deal with the EU.
The NIESR shrugged off recent economic forecasts from both the Bank of England (BoE) and the UK Government’s Office for Budget Responsibility (OBR), which predicted a lower GDP growth rate for this year.
NIESR experts said the BOE and OBR’s methodology is inadequate, with economists insisting that government and central bank officials have based their forecasts on a range of possible Brexit outcomes, which are nearly impossible to predict due to the ever-changing political and diplomatic implications of the divorce process.
“I’ve argued since before the referendum that it makes no sense to aggregate across different Brexit outcomes,” NIESR Director Jagjit Chadha said.
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The NIESR also said the UK economy could slow down to 0.4 per cent annual growth rate for 2019 if Britain crashes out of the EU without a deal. This would be due to a slump in capital formation, foreign direct investment (FDI), and asset values across various sectors of the economy.
Still, experts believe that any of the two outcomes would still leave Britain with a higher GDP growth rate than Germany.
Some economists have voiced concerns that the European economic powerhouse is facing a recession due to disruptions in international trade and their negative effects on German exports, banking sector instability and fiscal woes in Eurozone member Italy, and a lack of accommodative mechanisms at the European Central Bank (ECB).
The Office for National Statistics (ONS) said the UK’s quarter-on-quarter GDP growth rate was 0.3 per cent in the fourth quarter of 2018 (Q4), down from 0.4 per cent in the previous reporting period.
Meanwhile, researchers said the UK’s industrial production dropped by 1.5 per cent — the biggest decline since August 2013.
However, production in Germany declined by 1.9 per cent this past November alone, while year-to-date German factory output fell 4.7 per cent as of that month.
Experts say the Brexit uncertainty is hurting economies on both sides of the English Channel — but Britain’s ultra-low unemployment rate is softening its impact on households.
“There may well be a common theme which is hurting the factory sector throughout Europe, for example changes in the auto industry,” Philip Shaw of Investec said
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Meanwhile, a separate report from Capital Economics predicts the UK’s economic growth to be 1.8 per cent for 2019 if PM May ensures a soft and orderly Brexit. If the PM fails to reach a Brexit consensus in parliament, Britain’s GDP growth rate would slow down to 1.5 per cent for this year, according to Capital Economics.
Finally, if Britain leaves without a deal, it could face a recession, with GDP shrinking by 0.2 percent in 2019 alone.
“Given the huge and growing uncertainty surrounding Brexit, we are now placing much more emphasis on three forecasts for the economy that are based on different Brexit outcomes”, Capital Economics’ Paul Dales said.
In this light, some point out that many experts had predicted a recession to take place immediately after the ‘Leave’ vote back in June 2016. However, these fears failed to materialise, as a subsequent devaluation of pound sterling helped Britain boost its exports — which are still expanding today.
Such consideration might render the fears of a hard Brexit questionable to say the least, while some Conservative Party MPs have suggested a no-deal scenario would simply mean a return to World Trade Organisation (WTO) rules in cross-Channel trade.
Most forecasters also conceded that the possible impacts of a no-deal Brexit are still hard to quantify, as it remains unclear how many investors would actually pull their capital from the UK, and how many property and business owners would liquidate their British assets.
And, most importantly, it’s yet to be seen how Britain’s international trading partners will react to Brexit, either distancing themselves from the UK or using the withdrawal as an opportunity to explore new avenues for bilateral trade.