CONSENSUS FORECAST - FocusEconomics · FOCUSECONOMICS United Kingdom ocusEconomics Consensus...

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CONSENSUS FORECAST UNITED KINGDOM 2 CALENDAR 23 NOTES 25 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 MASSIMO BASSETTI Economist TERESA KERSTING Economist ANDREA VETRUGNO Economist OLGA COSCODAN Economist JEAN-PHILIPPE POURCELOT Economist MIRIAM DOWD Editor

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

Page 1: CONSENSUS FORECAST - FocusEconomics · FOCUSECONOMICS United Kingdom ocusEconomics Consensus orecast | 2 July 21 United Kingdom Special Report: UK After the Brexit In an unprecedented

CONSENSUS FORECAST

UNITED KINGDOM 2CALENDAR 23NOTES 25

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

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

United Kingdom • July 2016

ContributorsARNE 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

MASSIMO BASSETTI Economist TERESA KERSTING Economist ANDREA VETRUGNO Economist

OLGA COSCODAN Economist JEAN-PHILIPPE POURCELOT Economist MIRIAM DOWD Editor

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United KingdomSpecial 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.

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Year-on-year (right scale)

% %

Dirina MançellariSenior Economist

POLITICS | Uncertainty looms over the UK’s economic outlook post BrexitThe 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 2017GDP +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 1.241 month ago 1.46 1.50

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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.

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Gold Prices | in USD/toz

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

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Main financials 24-Jun 27-JunFTSE 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 (-3.4%) 17,140 (-1.5%)

GBP per USD 1.37 (-8.1%) 1.32 (-3.4%)

EUR per GBP 1.23 (-5.8%) 1.20 (-2.5%)

EUR per USD 1.11 (-2.1%) 1.10 (-1.3%)

JPY per USD 102.2 (-3.7%) 102.0 (-0.2%)

Brent 47.2 (-3.9%) 45.9 (-2.7%)

Gold 1,314 (4.0%) 1,324 (0.7%)

10Y Gilt yield 1.09 0.9510Y Bund yield -0.06 -0.1110Y US bond yield 1.57 1.46

Market Reaction | Values and daily variation in %

Note: Values of main global financial indicators and variation over the previous day in %.

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Brent Crude Oil Prices | in USD/bbl

Note: Brent crude oil spot prices in USD per barrel (bbl).Source: Thomson Reuters.

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Fitch Ratings Moody's S&P Global Ratings

AA+ Aa1 AAAOutlook Stable Outlook Stable Outlook Negative

AA Aa1 AAOutlook Negative Outlook Negative Outlook Negative

Credit Rating Agencies

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Note: Credit ratings for United Kingdom’s sovereign bonds before and after the referendum. Source: Fitch Ratings, Moody’s and S&P Global Ratings.

their investments. This also suggests slower hiring, which in turn will likely decrease employment growth. For the majority of businesses in the UK, Brexit is a major source of concern. Multinational companies that have chosen to locate their offi ces in the UK in order to have access to the EU’s single market may consider relocating. However, these decisions will likely take place once the relationship terms between the UK and the EU is clearer. Azad Zangana, Senior European Economist and Strategist at Schroders comments:

“The fall in investment and hiring is likely to be felt by households as employment growth slows and possibly falls. Meanwhile, sterling is expected to depreciate signifi cantly, which could boost the competitiveness of UK exporters, but uncertainty over trade arrangements, especially with Europe, would dampen the otherwise positive impact on overseas demand.”

Mikael Olai Milhøj, Senior Analyst at Danske Bank, further analyzes the consequences of Brexit on the labor market:

“We expect the UK to fall into recession in the second half of the year which would likely cause unemployment to rise with a lag. UK is likely to be hit by falling investments due to higher uncertainty about the future economic environment for British fi rms. It is also likely that private consumption growth will slow. The longer-term consequences depend on the future UK/EU relationship and are more diffi cult to estimate. In the very short term, we expect GBP volatility to remain high. We expect EUR/GBP to stabilise in 0.85-0.90 range. Medium and long-term outlook is very uncertain. Flows, growth and relative monetary policy point towards a weaker GBP.”

The sharp depreciation of the sterling will drive infl ation up through higher import prices, thus hurting disposable income and decreasing real wages. Moreover, a worsening outlook of the labor market could in turn lead to an increase in precautionary saving, therefore weighing on overall domestic demand. On the bright side, a weaker currency could bode well for trade as it will make the British exports cheaper to sell abroad, even though uncertainty regarding trade agreements, in particular with Europe, will likely offset the positive impact. William Devijlder, Economist at BNP Paribas, comments on the economic implications and also on some potential gains from Brexit:

“We expect the economy to be negatively affected through four main channels: uncertainty and confi dence; fi nancial markets; foreign direct investment and other capital fl ows; and trade and income fl ows. There are, however, some potential gains from an exit that could soften the impact: an end to the UK’s contribution to EU budget, or at least a reduction, should the UK end up as a European Economic Area (EEA) member; an ability to agree bilateral trade deals with non-EU economies (currently this is done by the EU on behalf of the UK); greater control over regulation, which could raise productivity and supply-side potential; and increased competitiveness, since sterling is expected to weaken.”

Once the separation process offi cially begins, the United Kingdom will need to negotiate new trade deals with the remaining 27 members of the European Union, with which it has a trade defi cit. Today nearly half of its exports go to the EU, with Germany accounting for the biggest share, while imports from the EU account for 54% of the UK’s total imports. Analysts believe that the ideal solution for the UK would be a trade model that minimizes the economic damage while also assuring political independence. An immigration policy that is not independently determined by the UK could be a deal breaker

10-Year Bond Yields | UK and Germany

Note: 10-year bond yields of the United Kingdom and Germany in %.Source: Thomson Reuters.

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UK 10-year bond yield

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