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UK economy to lose 3.5 percent of GDP in no-deal Brexit – IMF

Britain will suffer economic damage equivalent to the loss of at least 2-3 years of normal growth between now and the end of 2021 if it leaves the European Union without an exit deal, the International Monetary Fund warned on Tuesday.

The world’s fifth-biggest economy could quit the EU as soon as Friday, disrupting its ties with the bloc that it joined 46 years ago, if Prime Minister Theresa May cannot agree a delay with EU leaders on Wednesday.

The IMF said that even in a relatively orderly no-deal Brexit scenario — with no delays at borders and minimal financial market turmoil — the economy would grow 3.5 percent less by the end of 2021 than it would under a smoother Brexit.

“The increase in trade barriers has an immediate negative impact on UK foreign and domestic demand,” the IMF said.

The EU economy would suffer too but by much less than Britain, facing an estimated 0.5 percent hit to gross domestic product compared with a smooth Brexit scenario, the IMF said.

British exports to the EU and other countries which have trade deals with the bloc would face new tariffs and regulatory barriers if Britain reverted to the World Trade Organisation rules favoured by some Brexit supporters.

Supporters of an abrupt Brexit have accused the IMF of making politically motivated forecasts in the past.

In its report on Tuesday, the fund said a worse-case no-deal Brexit scenario involving border delays and financial market turmoil would increase the damage to about 4 percent of GDP by 2021.

The forecasts took into account the British government’s plans not to impose tariffs on most categories of imports in the event of a no-deal Brexit, and also assumed that the Bank of England would cut interest rates.

BoE Governor Mark Carney gave broadly similar estimates of the cost of a no-deal Brexit last month, when he said preparations by government and businesses could mitigate only some of the damage of a no-deal Brexit.

A spokesman for Britain’s finance ministry said the government wanted to leave the EU with a deal but was getting ready for a possible no-deal Brexit.

The IMF downgraded its forecast for economic growth in Britain this year to 1.2 percent from a forecast of 1.5 percent it made three months ago, which would be the weakest since 2009.

Growth for 2020 was seen picking up to 1.4 percent, but in both years Britain’s economy was predicted to grow less than the euro zone, in contrast to before the 2016 Brexit referendum.

“The downward revisions … reflect the negative effect of prolonged uncertainty about the Brexit outcome, only partially offset by the positive impact from fiscal stimulus announced in the 2019 budget,” the IMF said.

The BoE should take a “cautious, data-dependent” approach to monetary policy, it added.

Reporting by David Milliken; Editing by William Schomberg

Source: UK Reuters

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UK economy to lose 3.5 percent of GDP in no-deal Brexit – IMF

Britain will suffer economic damage equivalent to the loss of at least 2-3 years of normal growth between now and the end of 2021 if it leaves the European Union without an exit deal, the International Monetary Fund warned on Tuesday.

The world’s fifth-biggest economy could quit the EU as soon as Friday, disrupting its ties with the bloc that it joined 46 years ago, if Prime Minister Theresa May cannot agree a delay with EU leaders on Wednesday.

The IMF said that even in a relatively orderly no-deal Brexit scenario — with no delays at borders and minimal financial market turmoil — the economy would grow 3.5 percent less by the end of 2021 than it would under a smoother Brexit.

“The increase in trade barriers has an immediate negative impact on UK foreign and domestic demand,” the IMF said.

The EU economy would suffer too but by much less than Britain, facing an estimated 0.5 percent hit to gross domestic product compared with a smooth Brexit scenario, the IMF said.

British exports to the EU and other countries which have trade deals with the bloc would face new tariffs and regulatory barriers if Britain reverted to the World Trade Organisation rules favoured by some Brexit supporters.

Supporters of an abrupt Brexit have accused the IMF of making politically motivated forecasts in the past.

In its report on Tuesday, the fund said a worse-case no-deal Brexit scenario involving border delays and financial market turmoil would increase the damage to about 4 percent of GDP by 2021.

The forecasts took into account the British government’s plans not to impose tariffs on most categories of imports in the event of a no-deal Brexit, and also assumed that the Bank of England would cut interest rates.

BoE Governor Mark Carney gave broadly similar estimates of the cost of a no-deal Brexit last month, when he said preparations by government and businesses could mitigate only some of the damage of a no-deal Brexit.

A spokesman for Britain’s finance ministry said the government wanted to leave the EU with a deal but was getting ready for a possible no-deal Brexit.

The IMF downgraded its forecast for economic growth in Britain this year to 1.2 percent from a forecast of 1.5 percent it made three months ago, which would be the weakest since 2009.

Growth for 2020 was seen picking up to 1.4 percent, but in both years Britain’s economy was predicted to grow less than the euro zone, in contrast to before the 2016 Brexit referendum.

“The downward revisions … reflect the negative effect of prolonged uncertainty about the Brexit outcome, only partially offset by the positive impact from fiscal stimulus announced in the 2019 budget,” the IMF said.

The BoE should take a “cautious, data-dependent” approach to monetary policy, it added.

By David Milliken

Source: UK Reuters

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UK economy ‘losing £600m because of Brexit every week’

Brexit has cost the UK economy £600 million a week since the referendum, and the shock of a no-deal divorce could hammer the country even harder.

A new report published by investment banking giant Goldman Sachs suggests that, since the June 2016 vote, nearly 2.5 per cent has been shaved off GDP.

It argues that, had UK voters opted to remain, the economy would have been in a much stronger position, instead of underperforming and lagging behind other advanced economies.

Goldman’s number crunchers concluded that investment has been one of the biggest casualties of the Brexit debacle, confirming official data which has shown it in decline.

“The component-level breakdown reveals that output losses have been concentrated in investment and private consumption,” they said.

“The outsized impact on investment suggests that political uncertainty associated with the Brexit process may, indeed, be one of the major sources of the economic cost of Brexit.”

The report echoes Bank of England analysis that suggested around £40 billion per year, or £800m a week, of lost income for the country as a whole since the result of the leave vote.

Goldman added that under a no-deal scenario, favoured by the most extreme Tory Brexiters, the UK will be a big loser, but its European neighbours would also suffer.

It said: “Under our ‘no-deal’ scenario, the UK suffers large output losses, in conjunction with a substantial global confidence shock marked by a sharp sterling depreciation. European countries would be most exposed to this scenario and could see output losses of around 1 per cent of real GDP.”

Conversely, a “status quo” Brexit transition deal would reverse part of the UK’s output underperformance and, under a remain scenario, the UK “fully recoups Brexit-related output costs and business confidence rebounds”.

Separate figures yesterday showed Brexit stockpiling helped fuel a surge in manufacturing output last month as firms sought to avoid being caught short ahead of what was supposed to be Britain’s departure from the EU.

The Markit/CIPS UK manufacturing purchasing managers’ index showed a reading of 55.1 last month compared with the 52.1 recorded in February. It represents a 13-month high and beat expectations from economists, who forecast a reading of 51.2. A figure above 50 indicates growth.

Rob Dobson, director at IHS Markit, which compiles the survey, said: “Output, employment and new orders all rose as manufacturers and clients raced to build safety stocks. Stocking of finished goods and input inventories surged to new survey-record highs.”

Source: Scotsman

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UK Economy Roars Back to Life in New Year with Strong GDP Beat

– UK economy rebounds with a bang in January as GDP rises 0.5%.

– Rebound more than offsets -0.4% decline seen back in December.

– And may be enough for markets to keep faith with BoE rate hike bets.

The UK economy rebounded from its December slump early in the New Year, according to Office for National Statistics (ONS) figures released Tuesday, and momentum behind the recovery could be enough to ensure financial markets keep faith with hawkish bets about Bank of England (BoE) interest rate policy.

The UK economy grew by 0.5% in January, which more than reverses the -0.4% decline seen back in December, when markets had been looking for only a 0.2% increase in the New Year.

All main sectors of the economy contributed to growth during the January month, with the exception of agriculture, although the standout performer was the construction sector which saw output rise by 2.8%. However, that simply reverses a -2.8% decline from December.

“The larger than expected monthly increase in GDP of 0.5% in January (consensus 0.2%) is a reassuring sign that, up until January at least, the UK economy was weathering the political crisis at home and slowdown overseas pretty well,” says Andrew Wishart, an economist at Capital Economics.

“The rebound in GDP in January, after December’s 0.4% month-to-month drop, is a timely reminder that the PMIs aren’t a reliable indicator of the economy’s momentum when political uncertainty is elevated,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Tuesday’s report comes after IHS Markit PMI surveys of the services, construction and manufacturing sectors suggested strongly that the economy ground to a halt in January.

Those PMI surveys continued to point toward economic stagnation after ONS data revealed the December GDP contraction, leading to increased speculation that the economy had hit a rough patch just as the March 29, 2019 Brexit day appeared on the horizon.

ONS figures for January show the economy rebounding resolvedly from its December trough but the UK economic picture painted by Tuesday’s numbers is entirely different when viewed over a longer horizon, because GDP grew by just 0.2% for the three months to the end of January.

Above: Sectoral contributions to UK GDP growth on a three-month basis.

Quarterly growth was led by a robust expansion in the services sector but the increase was unchanged from the 0.2% pace of growth seen in the final quarter of 2018 and takes the shine off of Tuesday’s headline.

On a three-month basis the services sector expanded by 0.38% while output from the construction sector declined -0.04% and output from the industrial sector fell -0.12%. However, economists say the pace of growth in the January month alone could be more important for the outlook than the three-month number.

“January’s increase in GDP exceeded even our top-of-the-range 0.4% forecast, so we are revising up our forecast for quarter-on-quarter growth in Q1 to 0.3%, from 0.2%. This implies that little, if any, excess capacity will open up in the first half of the year, giving the MPC little time to delay another rate hike if, as we expect, GDP growth regains some momentum once a Brexit deal has been signed off,” says Tombs.

Tuesday’s data follows a year in which UK GDP grew by just 1.4% after the economy expanded by 0.2% in the final quarter, 0.6% in the third quarter, 0.4% in the second quarter and just 0.1% in the first quarter. That was the weakest expansion since 2012, and one that many economists have attributed to uncertainty over the Brexit process.

First quarter GDP growth has tended to be weak in recent years and given the performance of the economy in 2018, expectations for the New Year period in 2019 have been particularly downbeat. But some economists are telling their clients that Tuesday’s figures could mean this year is different.

“There is no denying that today’s figures suggest the economy is weathering the Brexit storm remarkably well,” says Wishart of Capital Economics. “Of course, the data may deteriorate in February and March if Brexit has caused consumers and firms to reach for the handbrake. But note that even if monthly GDP growth is zero in February and March, the economy would still grow by 0.4% in Q1. As a result, we are happy to stick with our 0.3% q/q forecast.”

UK economy

Above: UK GDP growth trends.

Currency markets care about the GDP data because of what it might mean for Bank of England interest rate policy. Rising demand within an economy can often mean increased inflation pressures, and it is changes in the consumer price outlook that dictate BoE interest rate decisions.

The BoE has raised rates by 25 basis points on two occasions since the referendum in 2016, taking the Bank Rate up to 0.75%, and it’s said repeatedly in recent months that elevated inflation and a robust outlook for consumer price pressures mean it’ll need to keep raising rates in the coming quarters.

However, pricing in the overnight-index-swap market implies a BoE bank rate of just 0.81% for December 19, 2019, which is just 6 basis points above the current cash rate and suggests strongly that investors have only limited appetite for betting on a BoE rate hike coming this year.

The actual Bank Rate that would prevail if the BoE were to hike again is 1%. As a result, there is significant scope for investors to price-in BoE policy action for 2019, which would be positive for Pound Sterling exchange rates if such a thing were to happen.

Many economists say a deal facilitating an orderly exit of the UK from the EU would be enough to persuade the BoE to come off the sidelines and lift its interest rate again.

By James Skinner

Source: Pound Sterling Live

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UK economic growth slowed in fourth quarter

UK economic growth slowed in the final quarter of last year as car manufacturing declined at its steepest rate in just under a decade.

Gross domestic product (GDP) growth fell to 0.2% between October and December, according to the Office for National Statistics (ONS).

This compares to 0.6% growth in the previous quarter, when warm weather and the World Cup contributed to a boost in economic activity.

Meanwhile, annual GDP increased by 1.4%, the weakest it has been since 2009.

Sterling tumbled following the news, dropping 0.4% versus the US dollar to 1.28. Against the euro, the pound was down 0.1% at 1.14.

But Prime Minister Theresa May’s official spokesman said: “The UK economy continues to grow and remains fundamentally strong.”

Car production was down 4.9% in the period, marking the biggest decline since the first quarter of 2009.

Total production output slipped by 1.1%, the largest decline since the end of 2012. This included a 0.9% dip in manufacturing.

Construction was also lower, dropping 0.3% in the fourth quarter. This follows two consecutive quarters of growth during the summer, when companies caught up with work delayed by adverse weather early in the year.

Although services output was up, growth slowed to 0.4% following a relatively strong performance during the summer.

UK economic growth
(PA Graphics)

The ONS said it reflected a slowdown across a number of industries, as Brexit-related concerns weighed on business-to-business spending at the end of 2018.

Speaking about the impact of a potential no-deal Brexit on the economy, Chancellor Philip Hammond told ITV: “Business is challenged, I accept that, but we can’t convey information that we don’t have. We don’t know how some of our partners on the other side of the channel will behave in the event of no-deal Brexit.

“My judgement is that we are likely to get the (Prime Minister’s) deal through Parliament but I can’t be 100% certain, and that is why we are doing the contingency planning we are doing. Once businesses have clarity, they will invest again.

“No deal would be a very bad outcome for economy,”

Rob Kent-Smith, head of GDP at the ONS, said: “GDP slowed in the last three months of the year with the manufacturing of cars and steel products seeing steep falls and construction also declining. However, services continued to grow with the health sector, management consultants and IT all doing well.

“Declines were seen across the economy in December, but single month data can be volatile meaning quarterly figures often give a better indication of the health of the economy.”

Compared with the same quarter in 2017, the UK economy is estimated to have grown by 1.3%, the weakest in six years. It was last weaker in the second quarter of 2012.

On a month-to-month basis, GDP fell 0.4% in December. This was the biggest monthly drop since March 2016.

Howard Archer, chief economic adviser at EY Item Club, said the figures were “disappointing”.

“The UK economy clearly changed down into a much lower gear in the latter months of 2018 as heightened economic, political and Brexit uncertainties fuelled business caution in particular,” he said. “There are also signs of consumers becoming more cautious despite a pick-up in their purchasing power.”

Samuel Tombs of Pantheon Macroeconomics warned against interpreting the data as evidence of an impending recession.

He said: “On the face of it, the sharp fall in GDP in December looks alarming, but it isn’t unprecedented — it also fell by 0.4% in March 2016 — and it was driven by sectors which have historically been volatile.”

Separately, the ONS data dump showed that Britain’s total trade deficit widened slightly in the last three months of the year by £900 million to £10.4 billion, due to a rise in goods imports including cars and chemicals.

Source: BT

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Disappointing end to 2018 for UK economy could be confirmed this week

A disappointing end to 2018 for the UK economy could be confirmed by official GDP figures later this week, analysts have warned.

Last week the closely-followed IHS Markit/ CIPS Purchasing Managers’ Index (PMI) revealed a three-month low in UK construction sector activity in December and a 29-month low in job creation in the services sector.

But the manufacturing sector posted a near-record increase in stock holdings in December.

Economists predicted a 0.1 per cent rise in GDP for November, when the Office for National Statistics release figures on Friday – it would leave the UK on track for the lowest GDP rise since 2009.

“We think that a repeat of the previous month’s modest 0.1% expansion in the size of the economy is likely,” Martin Beck, analyst at Oxford Economics, said.

Beck added that while a composite measure of PMIs in November dropped to the lowest level since July 2016, it would be offset by a strong performance in the retail sector and upbeat industrial data for the month.

The research firm also expected GDP to rise 0.3 per cent in the fourth quarter to leave 1.4 annual growth – the lowest since 2009.

Daiwa Capital Markets also said last week’s PMI data implied “minimal growth” in the final quarter of the year and predicted GDP growth of 0.1 per cent in November, unchanged from October, but on track for a “sharp slowdown” from the 0.6 per cent growth in the third quarter.

The investment bank’s analysts also expected manufacturing and construction output to be stronger for November than the previous month but a slowdown in services activity.

They said: “The manufacturing and construction PMIs, released the past couple of days, provided a mixed picture of business sentiment at the end of the year.

On the whole, however, we took a downbeat message from them, not least as the boost to manufacturing activity mainly reflected stock building ahead of a possible no-deal Brexit.”

Source: City A.M.

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UK economy grows but business investment falls for third consecutive quarter

The UK economy grew at its fastest rate in almost two years in the three months to September but business investment fell for the third consecutive quarter.

GDP grew by 0.6 per cent in the third quarter, the Office for National Statistics said today, confirming its initial estimate last month.

But the longer term picture remain “subdued” it said, with business investment dropping 1.1 per cent to £46.9bn.

It is the first time investment has dropped over three consecutive quarters since the economic downturn of 2008 to 2009.

The UK’s current account deficit widened by £6.6bn to £25bn (4.6 per cent of GDP) in the three months to the end of September – the largest deficit since the third quarter of 2016.

The widening was down to increased profits from British companies flowing to foreign investors.

EY Item Club economist Howard Archer said: “The further, marked rise in the current account deficit is disappointing as an elevated shortfall is a potential source of vulnerability for the UK economy – particularly if there was any major loss of investor confidence in the UK for any reason such as Brexit concerns.”

ONS figures also showed that borrowing in November was £7.2bn, the lowest November borrowing for 14 years and £900m less than the same month last year.

GDP growth was led by the services sector, while construction and manufacturing also contributed to the growth.

Household spending also increased 0.5 per cent, the eighth consecutive quarters in which households have spent more than they received.

Head of national accounts at the ONS Rob Kent-Smith said: “Today’s figures confirm the economy picked up in the third quarter with a solid showing from services and construction.

“However, the longer-term picture remains subdued and business investment has now fallen for three consecutive quarters.

“Households continued to spend more than they received, for an unprecedented eight quarters in a row.”

Source: City AM

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UK debt to soar to financial crisis levels over next five years

UK debt could rise to £6.7 trillion by 2023, from £5.1 trillion in 2017, according to new research.

The UK’s debt as a percentage of gross domestic product (GDP) is predicted to rise to nearly 260 per cent of GDP, a level not seen since the financial crisis.

The debt increase is expected to largely come from increased borrowing by companies and households, which are both predicted to borrow at a faster rate than economic growth, the analysis from accountancy firm PwC said.

The government is likely to reduce the size of its debt relative to GDP over the next five years, but even so, the net effect is set to be a gradual rise in the economy’s debt-to-GDP ratio from 252 per cent in 2017 to just under 260 per cent in 2023.

Total debt repayments could rise from a little above £150bn in 2017 to around £250bn by 2023 if interest rates rise two per cent.

Low income households could be hit particularly hard due to rising debt interest payments.

Chief economist at PwC John Hawksworth said: “While the financial crisis led to the private sector deleveraging, we’ve seen a change in behaviour among households and non-financial companies since 2015, when they began to accumulate debt at a faster rate than nominal GDP growth.

“The unusual amount of uncertainty facing the UK economy in 2018-19 due to Brexit, London’s stumbling housing market and the likelihood of further interest rate increases, means a pause in debt accumulation relative to GDP is possible in the short term.

“But if a smooth Brexit transition is agreed with the EU and UK business and consumer confidence recovers, the private sector is likely to resume faster rates of borrowing that could cause the debt stock to rise further relative to GDP.”

Source: City A.M.

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UK economy heading for worst year since crash, say economists

The British economy is heading for its worst year in almost a decade amid the growing risks from no-deal Brexit , according to a leading economic forecaster.

After official figures revealed zero growth in GDP in August, the EY Item Club said the economy would struggle to recover in the final months of the year owing to the increasing likelihood of Britain crashing out of the EU in less than six months time.

The group of economists, which is the only non-government forecasting organisation to use the Treasury modelling of the economy, said it had downgraded its growth forecast for this year and next as a consequence.

It forecast growth of 1.3% for the whole of 2018, down from a previous estimate of 1.4%. This would be the worst annual period for growth since the financial crisis. It also downgraded the outlook for the second quarter running.

EY Item Club forecast a modest recovery next year if there was a smooth Brexit deal, with growth of 1.5%, down from its previous estimate of 1.6%.
Economists have said failure to reach such a deal could significantly harm the UK economy, with the International Monetary Fund warning of “dire consequences” for growth.

The government’s economic forecaster, the Office for Budget Responsibility , last week raised the prospect of a no-deal scenario triggering border delays, companies and consumers stockpiling food and other supplies, and aircraft being unable to fly in and out of Britain.

The Item Club said Brexit uncertainties were influencing business investment decisions, but added that efforts to find alternative suppliers in the UK rather than the EU may lead to an increase in spending.

It also said weaker growth in the eurozone had sapped appetite for exports, as the world economy digests the impact of US import tariffs that have already begun to drag on economic activity.

Inflation is forecast to fall from about 2.7% to 2.3% by the end of the year, above the Bank of England’s target rate.

Consumer spending growth is estimated to remain limited as a consequence, as UK households remain under pressure from weak wage growth and relatively high levels of inflation.

Howard Archer, the chief economic adviser to the Item Club, said: “Heightened uncertainties in the run-up to and the aftermath of the UK’s exit could fuel business and consumer caution. This is a significant factor leading us to trim our GDP forecasts for 2018 and 2019.

“Should the UK leave the EU in March 2019 without any deal, the near-term growth outlook could be significantly weaker.”

Source: Gooruf

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GDP data shows mixed messages for UK economy

The UK economy grew faster than expected over the summer but appears to have juddered to a halt in August.

Data from the Office for National Statistics (ONS) released this morning, showed the economy grew by 0.7 per cent in the three months to the end of August.

Growth for June and July had been revised upward, but in August the first estimates suggest the economy did not grow at all.

Ben Brettell, senior economist at Hargreaves Lansdown, said the quarterly figure was better than expected but the data for August was a cause for concern.

He said: “Worryingly the dominant service sector has experienced a significant slowdown in growth over the past year or so, with an emerging trend for growth of around 1.5 per cent year on year.”

The ONS data came as the International Monetary Fund (IMF) revised downwards its projection for UK growth in 2018 to 1.1 per cent, having previously forecast it would be 1.3 per cent.

The IMF warned the UK’s public finances were among the worst in the world and, after compiling what was essentially a balance sheet for the UK economy,  said that on this basis the UK government had a negative net worth of more than £2trn.

Mr Brettell said: “Overall though the picture is still one of muddling through. Strong growth over the summer is likely to reassure policymakers that the recent interest rate rise was warranted, but they’ll be hoping to see the momentum maintained as Brexit approaches.

“Markets are still pencilling in a further rise around the middle of next year – though clearly a disorderly Brexit would pose a significant risk to that outlook.”

Jacob Dieppe, head of trading at Infinox, said: “The economy hasn’t given up the fight but it’s by no means firing on all cylinders. It’s somewhere in between and that will add to the uncertainty surrounding our exit from the EU.

“Optimists will see the August flatline as mere seasonal fall-out, cynics will see it as symbolic of a deeper malaise. What few will deny is that the disproportionate contribution of the services sector leaves the UK very exposed in the event of a fractious Brexit.

“If consumers sit tight, the rate of growth could quickly contract, all the more so if the Pound weakens further and drives up inflation.”

Source: FT Adviser