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Global View – 25 Nov vember 2015 5
UK - Brexit uncertain nty Nick Kounis Head Macro & Financ cial Markets Research
Eco onomy to rem main on a moderate m gro owth path Sterrling streng th, austerity y and Brexitt uncertaintyy to dampen n activity BoE E set to waitt a year or more m before raising ratees
Tel: +31 + 20 343 5616 nick.k kounis@nl.abnamro.com
Econom my on a moderrate growth pa ath The UK economy was the best performing economy y in the G7 in 22014, with GDP P rising by just %. However, e conomic growtth has slowed during d 2015. Inn the third quarrter, the econom my below 3% registere ed annualised g growth of around 2%. Busine ess surveys sugggest economic growth was a little firm mer in the fourth h quarter. slowdown wdown on the s The low What ex xplains the slow wdown in econo omic growth? The T slowdown in housing has s manifested itsself in weak construction sp pending. Manu ufacturing fell in nto recession, w with the weak global ment and sterlin ng strength like ely playing a ro ole. Finally, govvernment spen nding has been environm restraine ed given the go overnment’s effforts to rein in the t deficit. Agaainst these neg gatives, consum mer spending g has remained d buoyant.
UK ec conomic grow wth cools Index
% qoq
65
4
60
3
55
2
50
1
45 Q1 20 011
0 Q1 2012
Q1 2013
Q 2014 Q1
Composite PMI (lhs)
Q1 20 015
GDP (rhs)
Source: Thomson Reuters D Datastream
Growth likely to rema ain moderate ect the econom my to growth at around 2-2.5% % in the comingg quarters, which is in line witth We expe the trend d rate. On the p positive side, lo ow unemploym ment and rising wage growth should s continue e to underpin n consumer de emand. In addittion, the global environment sshould become e more favourable, with dom mestic demand in the eurozon ne – the UK’s main m export maarket – gaining some pace. However, there are a n number of drag gs on growth. First F of all, the government will w continue to tighten fiscal policy. In addition, sterling will likely strengthen againnst the euro, giiven further e ECB. This means manufacturers will losee competitivene ess. Furthermore, monetarry easing by the although h there are sign ns that housing g demand is on n the up, leadinng indicators for home building, such as new orders an nd housing starrts, remain in th he doldrums. he big issue in n 2016 Brexit th Finally, uncertainty u rela ated to the UK’’s future in the EU could also dampen economic activity in n the coming quarters. P Prime Minister Cameron C has set s out the key areas where the UK wants to o necessary to re ecommend continued membeership of the EU U to the British see reform it sees as n ace by 2017, but b the second half of next year is the most public. A referendum iss set to take pla likely tim ming.
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Global View – 25 Nov vember 2015 5
Reneg gotiation shou uld succeed, but b referendum m outcome un ncertain It seem ms very likely th hat the UK gov vernment has already a discusssed these prop posals behind th he scenes s in detail with European parttners. We doub bt that anythingg would have been b included in the refform agenda th hat would have e had a low cha ance of successs. Indeed, the proposals alrea ady seeme ed to receive a constructive first response frrom German C hancellor Ange ela Merkel. So it seems s more likely th an not that the e renegotiation will be successsful. Still the ou utcome of the referen ndum looks hig ghly uncertain. Opinion polls suggest s the in and out camps s are neck and neck, so s the referend dum could go either e way at th his stage.
Too close to o call - UK public opinion on EU
FDI F in the UK
Poll of polls, %
GBP G bn
55 50
Rest
45
260
40 35
EU 453
US 30 May
Jun
J Jul Remaain
Aug
Sep
O Oct
262 2
Leave
Source: S various po olls
Sou urce: BoE
Brexit uncertainty u The UK depends on tthe EU for trade and foreign n direct investtment. Seven of the top ten UK export destinations d arre in the EU. Almost half off all FDI into the UK comes from the EU U. A significant proportion o of the rest might be driven – at least in parrt – by the consideration thatt the et. Whether free e access wouldd continue follo owing an exit from f UK has free access to the EU marke w depend crucially on th he post exit agreements. How wever, the unc certainty aboutt the the EU would outcome e of the referen ndum and how w it will affect th he UK’s accesss to the EU market, m could make m business ses cautious. Itt could lead to lower FDI as well w weaker invvestment by UK firms that exxport to the EU. If the refere endum results in i a vote to sta ay in the EU, thhat ‘pent-up’ in nvestment dem mand ome back on sttream, leading to stronger gro owth in 2017. could co BoE on hold for mostt of 2016 ect the BoE to wait a year – or o even more – before raisingg interest rates s. Inflation remains We expe very low w and, with gro owth moderatiing, it will rise back to the 22% target only y slowly. Therre is therefore e no hurry for tthe MPC to mo ove to raise inte erest rates. Wee think it will sta art to raise inte erest in Novem mber of next ye ear, with furthe er steps to follow in 2017.