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UK economy should weather Brexit uncertainty, says ICAEW

Accountancy body says that the uncertainty, although weighing on business and consumer sentiment, may not damage the UK economy as much as expected.

Britain’s economy should be able to bear the burden of continued uncertainty, even though it continues to affect business and consumer sentiment, says the ICAEW in its latest economic forecast.

The accountancy body said the UK economy continues to enjoy some positives with pay growth continuing to outstrip inflation, unemployment forecast to remain very low and fiscal austerity being relaxed. Overall, the ICAEW’s 2019 growth forecast is expected to increase from 1.3% to 1.5%.

But while heightened and ongoing political uncertainty presents a risk to this outlook, it need not be too damaging to the overall economy. After the EU referendum in 2016, many expected a recession to follow. But in practice, GDP growth accelerated afterwards with the slowdown in 2017 and 2018 more modest than some forecasters predicted, said the ICAEW.

“In addition, while growth in real consumer spending in recent years has been depressed by higher inflation, growth in cash terms has been steady. An effective response from the Bank of England, not least continued low interest rates, has and should continue to aid the economy while the Government has relaxed fiscal austerity via tax cuts and extra public spending,” said the accountancy body.

ICAEW chief executive Michael Izza said: “There is no doubt that heightened Brexit-related uncertainty is weighing on business sentiment. Household and company spending and saving decisions are influenced by expectations of the future economic situation. But as long as a ‘no-deal’ Brexit is avoided, history suggests that the current ‘new normal’ of elevated uncertainty may not impact as much as some expect.

“Of course, cuts in investment by some businesses in response to uncertainty are unlikely to be reversed, even once the UK’s departure from the EU has been resolved. But if policymakers remain on the ball, the overall macroeconomic effect of the Brexit limbo businesses currently find themselves in should be manageable.”

Underlying factors

The ICAEW forecast pointed to a number of factors supporting its view. It said the UK economy saw faster growth in the first quarter of 2019 supported by ‘no-deal’ preparations. A 0.5% rise in GDP in Q1 was an improvement on the previous quarter’s sluggish 0.2% gain. However, a surge in manufacturing output suggests that the economy enjoyed temporary support from businesses stockpiling at the end of March.

“With an extension of the Brexit deadline to 31 October, an unwinding of the stockpiling effect suggests growth will have fallen back in Q2. The forecast has been upgraded to 1.5% from 1.3% three months ago. But given that ‘no-deal’, ‘deal’ or yet another Brexit extension all remain realistic possibilities, it makes forecasting uncertain at the moment,” said the forecast.

Business investment breaks a long-running fall. Having dropped in each quarter of 2018 (outside recessions, the longest continual decline since records began), business investment saw a surprise 0.5% rise in Q1 2019. “However, the same ‘no-deal’ worries which encouraged stockpiling may also have played a role in temporarily raising business investment in the form of warehousing and logistics. The underlying trend is still negative though, dragged down by ongoing political uncertainty,” said the ICAEW.

“Unemployment to remain low while pay growth stabilises. An unemployment rate of 3.8% in the first quarter of 2019 represented a near-45 year low, while the employment rate touched a joint-record high in the same period.

“The flexibility of the UK jobs market should support further jobs growth, but at a slower pace than recent years. However, the recent revival in pay growth appears to have reduced slightly to 3% year-on-year. This is expected to continue over the remainder of 2019,” it added.

But the ICAEW also warned uncertainty continues to hit investment. “It is very clear that heightened Brexit-related uncertainty is weighing on business sentiment. However, outside business investment, the real economic impact of periods of elevated political uncertainty is hard to identify.

“Appropriate monetary policy by the UK Government should be able to reduce the drag on demand and the role of uncertainty as a “whipping boy” in economics should be dealt with caution in using it as a catch-all threat to the economy,” said the accountancy body.


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