UK economy losing momentum – Natixis

After growing above expectations and leading the G7 in 2016, UK output growth slowed markedly to 1.5% y/y throughout 2017, as Brexit uncertainty undermined business investment while sterling depreciations fuelled higher inflation, explains Sylwia Hubar, Research Analyst at Natixis.

Key Quotes

“Despite the growth pick-up in exporting partners and a more competitive level of sterling, real GDP grew by 0.4% q/q in Q3 – the second slowest growth in the G7 after Japan – on the back of softening business investment (+0.2% q/q) and negative trade contribution (-0.5% q/q). On the upside, private consumption rebounded by 0.6% q/q in Q3 after slowing to 0.2% in Q2 (down from 0.9% in Q2 2016). As a result, the year-on-year growth rate remained at its Q2 level of 1.5%, well below last year’s average of 2.8%. Private consumption has been helped by robust employment growth and low interest rates. In contrast, subpar nominal wages – expanding below inflation – are likely to continue denting household purchasing power in the final quarter of 2017, as inflation reached 3.1% in November.”

“In the period ahead, uncertainty surrounding Brexit (first about the transition period and subsequently about trade and future relations) is going to weigh on investor and business sentiment. On the upside, robust global trade and an advantageous level of sterling should continue adding to exporters’ profit margins, which along with low cost of capital and limited excess capacity, are likely to ease somewhat the drag on investment stemming from Brexitrelated uncertainties. Private consumption is set to regain strength gradually as depreciationfuelled inflation eases and wages pick up.”

“UK should continue growing at a reduced level of potential, yet risks are tilted to the downside amid Brexit negotiations. On the upside, Brexitrelated worries have been downplayed in mid-December as the EU and the UK agreed to move forward to the second phase of negotiations. In addition, sound fiscal performance in 2017 has provided the UK with leeway to consolidate fiscal finances at a slower pace or even loosen fiscal stance should the economy disappoint.”

“The BoE has decided to withdraw some of its Brexit-induced stimulus and increased the Bank Rate by 25bps to 0.5% in early November. The MPC Committee indicated more interest rate increases over the next two years. We have kept our forecast of status quo in 2018 on the back of squeezed household purchasing power and postponed business investment, yet any larger upside news in 2018 could make us change our call.”