A report was produced by PwC in July 2016 giving an economic forecast for the UK economy post-Brexit. Below are some of the predictions;
Monetary policy and interest rates
- a loosening of monetary policy through a combination of lower official rates, assets purchase and credit easing. As indicated by record low gilt yields, it seems that a UK rate rise has been pushed well into the future by the Brexit vote. So far, the BOE has reduced the base rate to 0.25% and injected 70bn into the economy through quantitative easing i.e. the purchasing of government bonds.
- UK growth to slow to around 1.6% in 2016 and 0.6% in 2017, largely due to the increased political and economic uncertainty following the ‘Brexit’ vote.
- The fact that the EU is the UK’s largest export partner, accounting for around 45% of total UK exports will have a big effect on GDP since trade with the EU will likely be more difficult.
- The UK is the leading European financial services hub, which is a sector that could be significantly affected by Brexit making up a large % of GDP. Other sectors which rely on the EU single market will also feel a strong impact.
- A weaker pound will help exports, whilst import demand will weaken. This will make a positive contribution towards GDP and help to reduce the large current account deficit.
- Consumer price inflation (CPI) remained low at 0.3% in the year to May. The major cause of this persistently subdued inflation has been the low level of global prices for oil and other commodities, but unit labour cost growth also remained low despite the tightening of the labour market in recent years.
- Looking ahead, however, the 12 month inflation rate will tend to rise back to target as earlier commodity price declines fall out of the index and the effects on import prices of the recent fall in the pound feed through. Lower interest rates will incite consumers to spend but weaker demand due to the uncertainty caused by the vote to leave the EU will offset this to some degree.