Brexit and the outlook for the UK economy Dr Andrew Sentance CBE - - PowerPoint PPT Presentation

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Brexit and the outlook for the UK economy Dr Andrew Sentance CBE - - PowerPoint PPT Presentation

Nov 10, 2023 196 likes •437 views

Brexit and the outlook for the UK economy Dr Andrew Sentance CBE Former member of Bank of England MPC Senior Economic Adviser, PwC Building Societies Association Conference London, Wednesday 3 rd May 2017 Outline Global and UK recovery

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Brexit and the outlook for the UK economy

Dr Andrew Sentance CBE

Former member of Bank of England MPC Senior Economic Adviser, PwC Building Societies Association Conference London, Wednesday 3rd May 2017

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Outline

Global and UK recovery – the story so far What does Brexit really mean? Outlook for UK and global economy Implications for Building Societies

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The world economy is expanding

World GDP, US $ trillion (current prices)

33 66 75 100 20 40 60 80 100 120 2000 2010 2016 2022

The new normal Slide 3

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Global growth close to long-run trend

% per annum change in world GDP and consumer prices

Source: IMF World Economic Outlook, April 2017

  • 1

1 2 3 4 5 6 7 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 GDP growth Inflation 1980-2010 GDP growth trend

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PwC

  • IMF World Economic Outlook, April 2017

Ireland adjusted to reflect domestic economy

  • China

5

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UK unemployment among lowest in EU

Unemployment rate in 10 largest EU economies, % of workforce

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Germany UK Netherlands Poland Austria Sweden Belgium France Italy Spain

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Consumers supported growth in mid-2010s

% per annum change in UK GDP and consumer spending

Source: Office for National Statistics

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  • 4
  • 2

2 4 6 2000 2002 2004 2006 2008 2010 2012 2014 2016 GDP Consumer spending 2000-2016 GDP Trend

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… but the times they are a changing

% per annum annualised increase in key UK economic indicators

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0.5 1 1.5 2 2.5 3 3.5 GDP Services Manufacturing Employment

2014-16 2017Q1*

Source: Office for National Statistics * Based on most recent 6-months for employment

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Inflation has caught up with wage growth

% annual increase in average wages and consumer prices (CPI)

Source: Office for National Statistics

  • 1

1 2 3 4 5 6 Wage increases Price inflation (CPI)

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… causing a sharp consumer slowdown

% annual change in volume of retail sales, 3-month moving average

Source: Office for National Statistics

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1 2 3 4 5 6 7 Retail sales growth Average since 2011

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… as a weak pound has squeezed consumers

UK effective exchange rate, Jan 2005=100

Source: Bank of England

70 80 90 100 110 120 130 EER 1990-2008 Ave Ave since 2009

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UK household saving rate – low and falling

% of household disposable income available after deducting consumer spending

Source: Office for National Statistics 5 6 7 8 9 10 11 12 13 14 15

1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 Household saving fratio Average 1963-2016 Slide 12

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UK household debt is edging up again

Household financial liabilities as % of disposable income

Source: Office for National Statistics 90% 100% 110% 120% 130% 140% 150% 160%

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Debt as % of income Average 1987-2003 Slide 13

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Economic consequences of UK leaving EU

Economic shock creating investment uncertainty and squeezing consumer spending (short-term) Impact on trade and investment flows – possible disruption vs new opportunities (long-term) Negative impact on migration from EU (short-term and long-term) More regulatory freedom (long-term) Lower fiscal contributions (long-term)

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Economic scenarios for UK post-Brexit

Index of GDP, 2005 = 100

Sources: ONS and PwC Post-Brexit Scenarios, updated for most recent data 95 100 105 110 115 120 125 130 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Pre-Brexit Central scenario (FTA) Downside (WTO) Current forecast

  • !"#

$%"

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“Brexit means Brexit” strategy

Theresa May: key priority is to control immigration EU regulation to be absorbed into UK law and then repealed or amended in 2020s Single Market access – but not on current basis New UK-EU trade agreement likely to be based on ensuring market access for key industries which have already invested heavily in UK (eg cars, financial sector) Implies a more protectionist/interventionist approach to UK business and industry than we have seen since 1970s UK will seek to strike trade deals with non-EU countries but these will take a long time to deliver Government will aim to offset trade/investment downside with

  • ther policies (eg Industrial Strategy, tax and spending)

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Article 50 negotiation – key issues

Payment of exit contribution to EU budget to cover future liabilities (£20-60bn) People issues: rights of UK/EU citizens and future regime for immigration between UK and EU Trade in goods and services and access to UK and EU markets for key sectors – especially manufacturing and financial services Transition or implementation period

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Post-Brexit world economy in 2030

£trn at 2016 prices and market exchange rates

5 10 15 20 25 30

Spain Canada Russia Mexico South Korea Italy Indonesia Brazil France UK Germany Japan India EU-27 US China

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!

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PwC

&'(

PwC April 2016 Global Economy Watch

  • China

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UK economic outlook

% per annum growth

Source: Office for National Statistics, HM Treasury Consensus and PwC Forecasts

  • 5.0%
  • 4.0%
  • 3.0%
  • 2.0%
  • 1.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

GDP Consumer spending

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Prospects for UK interest rates

US interest rates now on a gradually rising trajectory Global economy set fair for reasonably healthy growth in 2017 and 2018, on current forecasts Despite projected slowdown in UK growth, unemployment rate expected to remain around 5pc, close to “full employment” Inflation rising – to around 3pc or higher later this year Household saving rate is falling, debt ratio is rising and house price inflation continues to outpace wage growth In the absence of a major shock to the world economy, UK rates should follow US policy of gradual rises 2-3 percent UK Bank Rate remains a reasonable expectation for early 2020s – ie lower than pre-crisis interest rate level

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Implications for Building Societies

  • Period of slower UK growth and economic volatility in

prospect – with higher inflation and weak £

  • Central scenario is this period of weaker growth and higher

inflation lasts 1-2 years followed by a return to 2% growth and inflation - a good performance in the “new normal”

  • Risk of a less satisfactory outcome remains, however, if Brexit

discussions with EU do not go well. This could prolong disappointing growth into early 2020s.

  • Financial services is a key sector potentially affected by Brexit

but a mass exodus from UK is most unlikely. UK gov’t will seek to protect other sectors heavily invested in UK – eg car industry

  • Despite reluctance of MPC, UK interest rates should follow US

in process of gradual rises – reaching c.2-3pc in early 2020s

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