The British economy will not grow at all in 2018 as the impacts of Brexit start to drag the UK’s prosperity lower, according to a new report from the Institute of International Finance (IIF) released this week.
The IIF — which brings together around 500 financial institutions around the world, and is chaired by UBS boss Axel Weber — said that a combination of falling private consumption linked to inflation, as well as waning foreign investment, will halt economic growth by 2018.
“We now expect annual growth of 1.4% this year and 0.0% in 2018,” the IIF says.
Here is the key extract from economists Ulrik H. Bie and Peter Nagle, who compiled the report:
While Brexit has been a somewhat abstract concept since the referendum, the triggering of Article 50 and the ensuing firming up of the European response has brought the uncertainty about the medium-term outlook to the forefront. Furthermore, inflation has started to depress real wage growth, while the MFI credit impulse turned negative in the second half of 2016 and has likely moved further into negative territory.
And here is the chart:
The UK economy has fared better than all but the most optimistic of forecasters imagined in the immediate aftermath of the Brexit referendum, confounding predictions of an immediate recession. Consumers stayed resilient, investment decisions change, and the economy basically ignored the uncertainty surrounding Brexit.
However, GDP growth slowed to just 0.3% in the first quarter of 2017, marking what many see as the start of the Brexit-related slowdown of the UK’s economy. While there are signs that things will bounce back a little in Q2, namely strong PMI surveys and retail sales in April, forecasters like the IIF still see growth remaining subdued in 2017
Britain will then slow to a complete standstill in 2018, the institute argued.
One driver of that slowing will be continued uncertainty about the UK’s future trade relationships around the world and its access to key trading blocs.
“Without the certainty of longer term market access, we continue to factor in a negative effect on larger, long-term investment plans during our forecast horizon — even if day-today business decisions and upkeep are proceeding unchanged,” Nagle and Bie note.
The IIF’s economists also note the big role that rising inflation and the consequent slowing wage growth that brings will have on the economy.
Here are the pair once again (emphasis ours):
“While wage growth is declining, inflation has picked up as a delayed response to GBP weakening (Chart 7). Although the latest GBP reversal has reduced upside risk to the inflation outlook, we still expect a steady increase to 2.8% later this year. That means a decline in real wages of 0.5% this year and zero growth in 2018 as a decline in inflation is offset by lower wage growth (Chart 8).”
And here is chart 8: