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Bank of England slashes UK growth forecasts amid Brexit uncertainties and global slowdown

The Bank of England today decided to leave interest rates unchanged as expected, but slashed UK growth forecasts as Brexit uncertainties mount.

The bank’s monetary policy committee (MPC), which last raised rates to 0.75 per cent in August last year, unanimously voted to hold interest rates for a fourth consecutive meeting.

The MPC said a UK economic slowdown in late 2018 “appears to have weakened” at the beginning of this year, citing softer activity abroad and greater effects from Brexit uncertainties.

It cut growth forecasts for 2019 to 1.2 per cent of GDP, down from its previous 1.7 per cent forecast in November.

It would be the weakest expansion since 2009.

The bank’s governor Mark Carney said business investment would soften further “before picking up sharply once the fog clears.”

Carney added that a “rapid decline in certainty” could push growth up by 0.5 per cent on its forecasts.

The growth outlook for 2020 was also trimmed to 1.5 per cent, from 1.7 per cent.

Sterling fell 0.41 per cent following the Brexit warning and lowered forecast, from $1.293 to $1.287, but has since surged up to $1.294 and 1.14 against the euro.

The committee said: “UK economic growth slowed in late 2018 and appears to have weakened further in early 2019.

“This slowdown mainly reflects softer activity abroad and the greater effects from Brexit uncertainties at home.”

It added that the economic outlook “depends significantly” on the nature of Brexit, specifically new trading arrangements and whether the transitions is smooth or abrupt.

In the minutes of its meeting, the MPC said: “Since the Committee’s previous meeting, key parts of the EU withdrawal process had remained unresolved and uncertainty had intensified.

“Businesses had appeared increasingly to be responding to Brexit-related uncertainties, and there were some signs that those uncertainties might also be affecting households’ spending and saving decisions.”

The MPC also unanimously voted to maintain its stock of UK government bond purchases at £435bn and its stock of corporate bonds at £10bn.

City A.M.’s shadow monetary policy committee unanimously voted to hold interest rates ahead of today’s meeting.

The panel of City economists cited “peak Brexit uncertainty” and the possibility of a continued global slowdown as reasons to leave the rate unchanged.

They noted that the UK labour market remained robust but that a global softening indicated caution.

This month’s guest chair, Tej Parikh, an economist at the Institute of Directors, said: “The speed of travel for interest rate hikes remains inextricably linked to what happens on 29 March. Right now, uncertainty is checking domestic demand.

“Businesses have been shelving investment plans, and consumers are also tightening their belts as Parliament remains in deadlock.

“Meanwhile, a potential global slowdown is adding a downside risk to the U.K.’s future economic growth.”

Source: City AM

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How a no deal Brexit will affect UK growth

Depending on how Brexit goes 2019 could see UK growth accelerate or almost grind to a halt. So, say two forecasting groups which have modelled the economic effects of the UK’s exit from the EU.

The UK’s National Institute of Economic and Social Research (NIESR) and the Organisation of Economic Cooperation and Development (OECD) have come to broadly similar conclusions. They estimate that with a deal and a transition UK GDP growth would average around 1.6% in 2019 and 2020. This would represent a modest acceleration from growth of roughly 1.3% this year. The expectation is that with Brexit risk reduced, activity, especially business investment, would bounce back.

Without a deal the NIESR and the OECD estimate UK growth would slow sharply, with the economy expanding by an average of about 0.4% over 2019 and 2020. This points to near stagnation in activity – though not a severe or protracted recession.

All forecasts need to be taken with a large pinch of salt. It is difficult to estimate how fast the economy grew in the previous quarter – let alone forecast what it will look like in one or two years’ time. Forecasts are fallible, and the longer term the forecast the more fallible it is.

Yet they are a worthwhile starting point for thinking about the future. Forecasts provide a structured way of assessing how a multitude of factors could combine to influence growth. The output – a GDP forecast – is a condensed summary of a complex view of the world.

There is no precedent for a no-deal exit from the EU. But past events – from the EU referendum in 2016 to the disruption of the three day week in 1974 and the euro debt crisis – offer clues.

A no deal exit might be expected to affect growth through three main channels. Any weakening in business and consumer confidence would weigh on investment and household spending. A fall in the pound would fuel inflation and squeeze consumer incomes. Regulatory disruption and uncertainty would tend to slow activity, much as the 2000 fuel protect did.

There is less concern today than in 2016 that a no deal exit might trigger a renewed credit crunch. Financial markets seem to think that the banks are well positioned to cope with such an eventuality. Last week the governor of the Bank of England, Mark Carney, noted that even when the risks of a no deal exit rise there is no rise in the cost of borrowing for banks.

The profile of UK growth in the coming months could become choppier as firms and consumers seek to insulate themselves against the risk of disruption by building stockpiles.

In its latest edition, The Economist announced that it is stockpiling around 30 tonnes of the paper for its UK print edition. Last week Majestic Wine said it would increase UK stock levels by up to 1.5 million bottles of wine. UK food retailers are also reported to have considered building stocks, though limited storage capacity, especially for fresh food, make this difficult.

Increased stockpiling adds to current activity at the expense of reducing future growth (In GDP terms it represents growth brought forward). The effects on quarterly GDP growth can be significant, making it harder to assess the underlying momentum of growth.

The official independent forecaster, the Office for Budget Responsibility (OBR), argues that if supply bottlenecks were to persist after Brexit output could decline significantly. The OBR drew comparisons with the introduction of an emergency three day working week in early 1974. It was made necessary by a miners’ strike which disrupted energy supplies and made full-time working impossible. Short time working contributed to a near 3% fall in quarterly output.

So how might the authorities respond to a no-deal exit? The Chancellor, Philip Hammond, has hinted at the need for a special Budget in such circumstances. It might seek to counter any immediate knock to growth by boosting public spending and cutting taxes.

Mr Carney has suggested that the Bank of England would be inclined to see a no-deal Brexit as a supply shock which would exacerbate bottlenecks and increase inflation risks. As such, the appropriate response, Mr Carney said last week, would be to raise interest rates.

Whether, faced with a sharp slowdown in growth, the Bank would follow through on this remains to be seen. Raising rates in the wake of a no deal exit would be politically controversial and economically contestable. Financial markets take the view that if the UK leaves without a deal the chances are that interest rates will be cut, not raised.

Finally, it’s worth noting that Brexit will be a major, but not the only factor, influencing UK growth in the next couple of years. The external environment, financial conditions and the unfolding path of the domestic economic cycle matter too.

PS: There has been a remarkable turnaround in the number of manufacturing jobs in the US. The number of American manufacturing jobs fell by 60% from the turn of the century to 2010. Since then, it has risen by 11%. While President Trump made the on shoring of manufacturing jobs part of his 2016 election campaign pledge, a modest revival in manufacturing may have already been well underway.

Source: Reaction

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UK growth falls to five-year low, Bank of England seen delaying rate hike

Britain’s economy suffered its weakest growth since 2012 in early 2018, with heavy snow only partly to blame, prompting investors to slash their bets on a Bank of England rate rise next month.

Britain’s economy grew by just 0.1 percent in the first quarter of 2018, well below the BoE’s prediction of 0.3 percent and at the bottom end of economists’ forecasts in a Reuters poll, official data showed on Friday.

Sterling tumbled by more than a cent against the U.S. dollar GBP=D3, and interest rate futures more than halved the chance of a May rate rise to less than 20 percent BOEWATCH.

“A very weak Q1 GDP print has ended the chances of a rate hike in May. For us, it means no hike at all in 2018,” John Wraith, a market strategist at UBS, said.

In year-on-year terms, growth slowed to 1.2 percent from 1.4 percent, its weakest since the second quarter of 2012 and a rate likely to keep Britain lagging behind its international peers.

A spokesman for Prime Minister Theresa May said the numbers were “clearly disappointing”, but played down suggestions that uncertainty over Brexit was to blame.

The slowdown from already modest quarterly growth of 0.4 percent in the fourth quarter of 2017 was driven by a sharp fall in construction output.

Unusually heavy snow storms in late February and early March, dubbed “the Beast from the East”, were known to have hurt some businesses before Friday’s data. But the Office for National Statistics said the problems went beyond that.

“While the snow had some impact, particularly in construction and some areas of retail, its overall effect was limited with the bad weather actually boosting energy supply and online sales,” ONS statistician Rob Kent-Smith said.

Consumer-facing businesses also slowed in the first quarter, the ONS said, probably reflecting higher inflation.

The pound’s fall after the June 2016 Brexit vote eroded households’ disposable income throughout last year.

The scale of the slowdown may unsettle the BoE’s Monetary Policy Committee (MPC), which next week begins considering whether to raise rates on May 10 for only the second time since the 2008 financial crisis.

However, some BoE policymakers have said early estimates of first-quarter GDP are often revised up – on average, by 0.3 percentage points – particularly at times of harsh weather.

“If the MPC wants to look through this number and hike they can justify it – they just have a challenge selling it to the man and woman on the street,” Scotiabank economist Alan Clarke said.

A key factor will be whether April purchasing managers’ surveys next week rebound from weak March readings. If they are similar to data this week from the Confederation of British Industry, the recovery may be limited.

RATE HIKE ODDS LENGTHENING

Until recently, most economists were predicting that the BoE would not be swayed by weak first-quarter data because inflation is running above its target and the unemployment rate is the lowest since 1975.

Two of the BoE’s nine policymakers voted to raise rates to 0.75 percent in March, saying the economy was running at close to full capacity – a view largely shared by their colleagues.

But many economists had begun to think the BoE might be getting cold feet about a May rate rise after Governor Mark Carney alluded to “mixed” data last week and the possibility of moving rates at a later meeting.

Markets now price in just one rate rise for 2018, probably by August and almost certainly by November.

UBS’s Wraith said he thought the economy would slow further, and that the BoE would be unable to raise rates later this year.

“Brexit-related anxiety is a headwind that is blowing more strongly as time goes by,” Wraith said.

In the final three months of 2017, Britain recorded the slowest year-on-year growth of any major advanced economy. For this year, the International Monetary Fund predicted last week that Britain would move ahead of Japan and Italy.

Britain’s preliminary GDP data – which only has 40 percent of the figures used to calculate the final estimate – precedes most other European numbers. But the French statistics agency has estimated French GDP growth fell to 0.3 percent during the first quarter from 0.7 percent in the quarter before.

Source: UK Reuters