According to National Bank of Canada analysts, recent growth numbers from the United Kingdom reflect a slowdown in the economy and they warn it could get worse.
Key Quotes:
“The spotlight is set to shine bright on the UK over the coming weeks. With less than 50 days left until the Brexit leave date, all eyes remain on Prime Minister May and her quest to negotiate a revised deal that can command sufficient support in Parliament. Recent weak GDP growth data further cloud an already grim picture for the world’s 5th largest economy, prompting dovish comments from the BOE, as the sterling continues to struggle amid the Brexit fog.”
“December’s monthly setback implies very poor momentum heading into Q1. The dominant service sector was the only positive contributor of quarterly GDP growth at 0.35%. On a year-on-year basis, the economy grew 1.3% in the fourth quarter, but below expectations for a reading of 1.4%, and the lowest since 2012. The sterling turned softer following the release of the numbers, with the GBP/USD dropping as low as 1.2855. Inflation numbers also came in weaker than expected at 1.8%,
falling below the BOE’s 2% target.”
“The possibility of extending Article 50 (i.e., kicking the Brexit can down the road) is a distinct one in our view, which could push the BOE to delay its next rate hike.”
“There’s no way around it, the latest slate of UK GDP numbers reflects a slowdown in the economy—and it could get worse. In a worse case scenario, a hard/no-deal Brexit could very well force the BOE to contemplate rate cuts to lean against such an exceptional shock to the system. An extension of the Article 50 deadline would likely tie the central bank’s hands as it waited to evaluate market reaction/impact on the economy. Indeed, if May is to deliver a smooth Brexit (still the BOE’s base-case scenario) and much needed stability to the economy/sterling, it will require a swift level of compromise among UK lawmakers that we simply haven’t seen thus far.”
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