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Transcript of CONSENSUS FORECAST - FocusEconomics · PDF file FOCUSECONOMICS United Kingdom ocusEconomics...



    PUBLICATION DATE 28 June 2016 FORECASTS COLLECTED 21 June - 27 June 2016

    INFORMATION AVAILABLE Up to and including 27 June 2016 NEXT EDITION 26 July 2016

    United Kingdom • July 2016

    Contributors ARNE POHLMAN Chief Economist

    ARMANDO CICCARELLI Head of Data Solutions

    RICARD TORNÉ Head of Economic Research

    RICARDO ACEVES Senior Economist

    ANGELA BOUZANIS Senior Economist

    DIRINA MANÇELLARI Senior Economist

    DAVID AMPUDIA Economist ROBERT HILL Economist MARLÈNE RUMP Economist



  • FOCUSECONOMICS United Kingdom

    FocusEconomics Consensus Forecast | 2

    July 2016

    United Kingdom Special Report: UK After the Brexit

     In an unprecedented vote on 23 June, the United Kingdom decided to separate from the European Union, thus raising concerns regarding the future of the British economy. The full economic impact of Brexit is not clear yet and the country will experience a prolonged period of uncertainty until new agreements are ratified. Following the Brexit news, Prime Minister David Cameron announced his resignation and also delegated the right to officially trigger the UK separation from the EU to his successor. The Leave vote prompted a collapse of the financial markets and the pound hit its weakest reading in over 30 years on 24 June. Besides the economic impact, there are other repercussions associated to the Brexit. Political risks such as the resurgence of the Scottish independence issue, increased tension within the ruling Conservative Party and the negotiation of new political links with the EU threaten the political stability of the country in the medium term.

     The Brexit vote threatens to rattle the country’s strong macroeconomic fundamentals, even though the full impact of the exit will take years to quantify. The panelists we surveyed this months have downgraded their GDP forecasts amid low business sentiment, a significant weaker currency and a gloomier outlook for the labor market. Our panel expects the economy to grow 1.4% in 2016, which is down 0.5 percentage points from last month’s estimate. For 2017, the panel projects that the economy will grow 0.3%.

     Inflation was stable at April’s 0.3% in May. At its 16 June meeting, the Bank of England kept the Bank Rate unchanged at 0.50%. Analysts see average inflation at 0.8% in 2016 and at 2.1% in 2017.

    Gross Domestic Product | variation in %

    Note: Quarter-on-quarter changes of seasonally adjusted GDP and year-on-year variation in %. Source: Office for National Statistics (ONS) and FocusEconomics Consensus Forecast.











    Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 2016

    Quarter-on-quarter s.a. (left scale)

    Year-on-year (right scale)

    % %

    Dirina Mançellari Senior Economist

    POLITICS | Uncertainty looms over the UK’s economic outlook post Brexit The United Kingdom’s vote to leave the European Union marked a turning point in British history and has cast a shadow over the country’s growth prospects and its position in the global economy. While Scotland and Northern Ireland, along with London, voted to ‘Remain’, the enthusiasm to stay within the EU was not echoed in Wales and most of England, where the majority of citizens voted to ‘Leave’. The potential economic consequences of this decision continue to evolve as this is the first time since the creation of the European Union that a country has decided to separate. However, regardless of how the UK moves forward form here, there is wide consensus that the country will experience a prolonged period of economic and political uncertainty until new agreements are approved.

    The Brexit vote is only the first step toward a full exit, a process that could last years. Until then, the United Kingdom is still part of the European Union, bound by EU treaties and regulations. Last year, the Conservative government promised to hold an in-out referendum and later negotiated the

    Main Revision to the UK forecasts

    2016 2017 GDP +1.4% +0.3% 1 month ago +1.9% +2.1%

    Investment 0.0% -2.6% 1 month ago +2.5% +4.0%

    Unemployment +5.2% +5.6% 1 month ago +5.1% +5.0%

    Fiscal Deficit -3.6% -3.8% 1 month ago -3.4% -2.6%

    Bank Rate +0.20% +0.29% 1 month ago +0.59% +1.13%

    10Y Bond Yields +1.28% +1.81% 1 month ago +1.86% +2.31%

    USD per GBP 1.27 1.24 1 month ago 1.46 1.50

  • FOCUSECONOMICS United Kingdom

    FocusEconomics Consensus Forecast | 3

    July 2016

    UK’s membership terms in the EU. However, Prime Minister David Cameron, who had originally supported the UK leaving the EU but later changed his tune, failed to convince the British people to stay within the EU despite the major concessions given to the country. This led to his resignation shortly after the results of the referendum were announced. Cameron proclaimed that he will leave the right to decide when to invoke Article 50 of the Lisbon Treaty to his successor and the former mayor of London Boris Johnson seems to be one of the most prominent candidates to become the new prime minister. Article 50 formally triggers the departure of a country from the Union and gives it a two-year period in which to negotiate trade, business and political links with the EU; this period can be prolonged by mutual consent.

    The new prime minister will likely be chosen by 2 September before the Conservative’s autumn conference, thus leaving Cameron in charge in the meantime and delaying the Brexit negotiations until after the beginning of September. However, the foreign ministers from the EU’s six founding members do not seem supportive of a delay in exit negotiations and have urged the British government to start the separation process as soon as possible in order to avoid a period of prolonged uncertainty within the already weakened bloc. The result of the referendum has created a split among the European leaders regarding how to handle Britain’s exit from the Union. Meanwhile, in the days following the vote, EU supporters have taken to the streets in protest and a petition to hold a second EU referendum has already been signed by nearly four million people. This paves the way for Parliament to discuss the validity of the vote, even though a rejection of the result is highly unlikely despite the small margin of victory.

    The UK’s vote to leave the EU came as a major shock to investors and the immediate reaction in global financial markets was negative. On 24 June, the value of the pound plummeted to an over-thirty-year low. Moreover, Britain’s main stock exchange indices dropped sharply amid political and economic uncertainly. In addition, the banks’ indices plummeted to a seven-year low. Meanwhile, some government bond yields dropped following the country’s vote and gold recorded its biggest surge in years on 24 June as investors rushed to safe-haven assets. Market volatility is very likely to remain high going forward and a prolonged political vacuum will only add to the uncertainty, all of which will weigh on the currency and the investment outlook.

    Credit rating agencies downgraded the UK’s AAA credit rating shortly after the vote and they also warned that there could be an abrupt slowdown in GDP growth. The credit downgrade has dealt yet another blow to the economy, especially considering the country’s wide fiscal and current account deficits. Moreover, the UK’s credit outlook was revised down by Moody’s and Fitch Ratings to negative amid fears that that the referendum result will have damaging implications for the country’s medium-term growth outlook. Scott Corfe, Director at Cebr, comments on Brexit:

    “The economic situation in the UK is highly volatile and subject to considerable uncertainty. Our central view is that economic growth will be much weaker in the short term as a result of Brexit, with sharp declines in business investment. The Bank of England is expected to respond by cutting the base rate of interest to zero over the next couple of months. Beyond 2018, we expect stronger growth to appear, but this is contingent on the UK reaching an agreeable trading arrangement with the EU, and the UK political landscape stabilising.”

    In the short term, the shock of the referendum result and the uncertainty regarding the negotiation period will prompt businesses to delay or cancel

    Exchange Rate | USD, EUR per GBP

    Note: Daily spot of U.S. dollar (USD) and euro (EUR) per British pound (GBP). Source: Thomson Reuters.






    Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

    USD per GBP EUR per GBP

    Gold Prices | in USD/toz

    Note: Gold LBMA in USD per troy ounce (toz). Source: London Bullion Market Association (LBMA).







    Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

    Main financials 24-Jun 27-Jun FTSE 100 6,139 (-3.2%) 5,982 (-2.6%) FTSE 250 16,088 (-7.2%) 14,968 (-7.0%) DAX 9,557 (-6.8%) 9,269 (-3.0%) CAC 40 4,107 (-8.0%) 3,985 (-3.0%) IBEX 35 7,788 (-12.4%) 7,646 (-1.8%) FTSE MIB 15,724 (-12.5%) 15,104 (-3.9%) Euronext 820 (-6.7%) 796 (-3.0%) Dow Jones 17,401 (-