- Top economist at Commerzbank warns of “even worse” than expected Brexit impact on UK economy.
- Expects that the economy will be largely “unexciting” in 2017 and 2018, but could suffer from Brexit output loss.
- Loss of output compared to if Britain had stayed in the EU to be more than 2% by end of 2018.
- A boost in exports, frequently cited by Brexit campaigners, is unlikely to materialise.
LONDON — The economic slowdown caused by Britain’s vote to leave the European Union could be even worse than expected, said Peter Dixon, the chief UK economist at Germany’s second largest lender, Commerzbank.
Speaking to Business Insider, Dixon said that while he expects the British economy to be pretty “boring” in the next couple of years, growth is going to be lower than it would have been had Britain voted to stay in the EU.
“It [the outlook] is solid, but if you look at it in a slightly bigger picture view, you’d say well, OK, it is significantly lower than we probably would have had were Brexit not happening. In that sense, I think there is a loss of output happening now,” Dixon said.
“By the end of next year, the loss of the output will be something in the order of 2% compared to what we would have had on our pre-Brexit forecast.”
Growth in the UK is expected to run at around 1.5% or 1.6% in 2017, according to Commerzbank’s forecasts, while the Bank of England projects growth of 1.7%. Growth in the first two quarters of the year has been slow, with GDP climbing 0.2% in the first quarter, and 0.3% in the second quarter.
Risks to the downside
“The risk is that it turns out even worse than that,” Dixon said.
“To me the risks are on the downside, because domestically we have a very low household savings rate, we have high inflation, and we have a central bank which is concerned about ongoing credit growth.
“They are not a set of circumstances which are particularly conducive to continued robust consumption. That’s the first thing to keep an eye on,” he said.
Brits are currently saving less than at any point in more than 50 years, with just 1.7% of incomes being put aside for a rainy day in the first quarter of 2017, lower than at any point since comparable records began in 1963.
This is worrying because, if the savings rate is falling because of rising prices and flat wage growth, it suggests Brits have little headroom to absorb further price rises. This could mean that Brits cut back on their spending.
Any spending slowdown would be disastrous for the economy, as it is consumer spending that has largely held up GDP growth since last year’s Brexit vote.
Rising debt is also seen as a major issue in the UK right now, with Alex Brazier, the Bank of England’s executive director of financial stability strategy and risk warning in July that expanding debt could lead to a so-called “spiral of complacency” taking hold in the UK.
He noted that outstanding car loans, credit card balance transfers and personal loans have all increased by more than 10%. Over the same period, household incomes have only risen by 1.5%, Brazier added.
“Household debt — like most things that are good in moderation — can be dangerous in excess. Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy,” Brazier told the University of Liverpool’s Institute for Risk and Uncertainty.
Investment will suffer
Dixon told BI that not only could consumption provide a risk to the downside, but so to could outward investment into the UK, particularly in the financial services sector.
“Companies are beginning to think about they’re going to do in 12-18 months time. Banks certainly are, we’ve seen a lot of the banks think about the need possibly to set up offices in the EU,” he said.
“That’s just sort of the thin end of a wedge which other companies will have to think about as well.”
Banks from across the world are currently assessing their options when it comes to Britain’s impending exit from the European Union. Most lenders from Japan and the USA currently have their European bases in London, but are expected to shift those operations to continental Europe to maintain an EU presence after Brexit.
Britain is expected to lose financial passporting rights, which allow banks with a base in the UK to sell products and services to customers and financial markets across the EU, after Brexit.
Numerous lenders, including Citigroup and the majority of Japan’s larger banks, have already confirmed plans to move staff out of London as a result.
Companies in other sectors are beginning to make similar moves, with Quartz reporting earlier in August that cosmetics company Lush is planning on shifting some of its operations to a rapidly growing factory in the German city of Dusseldorf.
“What we’ve got is slowing investment, slowing consumption, a government which doesn’t seem desperately keen to open the taps, and all that says is that you have a fairly moderate domestic growth outlook,” said Dixon.