Brexit starts to dent British economy

The British economy grew at a rate of 0.3 per cent in the second quarter, so economic growth remained relatively modest in the first half of the year. The steep increase in inflation caused by sterling’s depreciation has become a particularly negative factor. The Brexit effect is, therefore, initially coming in “through the back-door.” There is no sign of growth accelerating in the second half of the year. Indeed, the pace of growth is more likely to slow gradually until the end of next year. We are lowering our forecast for this year slightly from 1.8 to 1.6 per cent. Next year we continue to expect relatively sluggish growth of 0.8 per cent.

After a comparatively weak start to the year, economic growth in Great Britain also remained modest in the second quarter of this year – quarterly economic growth increased only slightly, up from 0.2 to 0.3 per cent. Consumer-related services, such as the retail trade, have admittedly managed to recover from the collapse in the first quarter, but overall British consumer sentiment remains lacklustre, which is mainly due to the steep increase in consumer prices. Construction activity was also a brake on growth in the past quarter. It is also suffering due to high prices for imported building materials. The sector is also finding it increasingly difficult to fill vacant jobs, which could also be linked with the significantly lower levels of immigration among eastern European EU foreigners.

So the British economy is feeling the first negative Brexit effects “through the back-door.” So far British companies appear to be surprisingly unruffled despite the host of uncertainties surrounding the planned withdrawal from the EU. At least they have not yet noticeably reduced their readiness to invest and in the meantime the export industry is jubilant about the weak pound. But the downside of the significant currency depreciation is the steep rise in import prices – mainly for consumer goods, but also for important production inputs. Higher inflation has now more than offset the already lean wage growth for private households and real wages are falling. Consumer spending, one of the most important motors driving the British economy, is beginning to falter.

The British economy is growing far more slowly this year. Nor is there any sign that growth will accelerate in the second half of the year given the negative effects caused by higher inflation. In addition, the extremely complex and unstable political situation since the parliamentary election is a source of further uncertainty. And finally, a growing number of international banks are saying that they intend to move business from the City of London. Admittedly, we shall be well into 2018 before these plans are implemented. But it is only a question of time before investment is also hurt by Brexit. Against this background, we continue to expect that economic growth will weaken significantly, slowing to only 0.8 per cent next year. This year GDP growth will, in light of the weaker first half of the year, probably be slightly lower than was previously thought, but at plus 1.6 per cent it will still remain very solid.

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