PwC: If little progress made early in Brexit negotiations, downturn likely in 2018

Even if Brexit negotiations “proceed smoothly”, PwC expect economic growth to slow. But a downturn is likely if talks don’t go well.

New research by PwC suggests the UK economy is set to slow even further than expected in 2017. In its report, PwC project GDP growth to slow from 1.8% in 2016 to around 1.5% in 2017. This is revised down from its last UK Economic Outlook report in March, which forecast GDP growth in 2017 to be 1.6%. The forecast for 2018 remained at 1.4%.

The PwC report points to slower consumer spending, higher inflation and slow wage growth as being behind the findings. PwC also said ongoing uncertainty around Brexit is likely to lead to subdued investment. Given the uncertainties and risks relating to international developments as well as the fallout from Brexit, PwC said “businesses need to monitor and make contingency plans for potential downside risks”.

There is no denying a marked change in the narrative around the UK’s economy compared to the months immediately following the referendum. The economy proved to be resilient despite fears over the consequences of the vote to leave with consumer spending helping to defy gloomy expectations. But a year on, we’re certainly feeling the consequences of that vote now.

Inflation, despite an unexpected fall in June, remains higher than it was before the referendum and also higher than wage growth. And whilst PwC notes that “consumers have increased borrowing to keep spending going”, there are “limits to how much further this can go” as the savings ratio fell to a record low in the first few months of 2017. Bloomberg also has a good piece with 10 charts showing how Brexit may well be approaching a tipping point for the economy.

Inflation has fallen but poorest still hit hardest by living standards squeeze

The ‘main scenario’ projections the report is based on assumes that Brexit negotiations “will proceed smoothly” and also “avoid an extreme ‘hard Brexit’” such as if no deal is reached. PwC sees this as the most likely scenario.

The report also includes analysis of an alternative growth scenario where little progress is made early on in Brexit negotiations and there is an increased likelihood of the UK falling back on WTO rules for trade with the EU. This, they called a ‘mild recession scenario’. PwC said “this would deepen and prolong the period of uncertainty around the outcome of Brexit, reducing investment, jobs and growth”. This scenario could see the UK experience a downturn in 2018.

In a more optimistic scenario, growth is projected at 2% and 3% for 2017 and 2018 respectively. This assumes “good early progress is made in UK-EU negotiations and there are strong favourable trends in US and euro area growth in 2017-18”. But, as things stand, this seems the least likely scenario. However, the report demonstrates just how much and how quickly progress in negotiations can impact on the economy.

And how are those negotiations going?

Round two of negotiations began this week and an update on progress isn’t expected until Thursday. However, the talks have been overshadowed by cabinet infighting in the UK with senior ministers at odds over the shape of any transitional deal as well as focused on a possible leadership contest.

This cartoon in the Times sums up the state of the government for Brexit negotiations this week.

And a photo op of the start of this week’s round of negotiations has also not helped to inspire confidence in the UK’s Brexit team…

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