In terms of UK’s near-term economic activity, things have picked up slightly in Q3: manufacturing indicators have improved and the service sector PMI has stabilised, albeit at a level below its historical average, notes Liz Martins, UK Economist at HSBC.
“The unemployment rate has continued its remarkable march downward, dropping to 4.3% – its lowest level since 1975 – in June. Against this backdrop, we have marked up our GDP growth forecasts for Q3 and Q4 to 0.5% and 0.4%, respectively (from 0.3% for both).”
“The broader story of subdued growth as the UK heads towards Brexit is little changed. However, following the MPC’s September meeting, we have reassessed our interest rate, currency and inflation forecasts. Following the hawkish signalling from the MPC in mid-September, we now expect rates to rise by 25bps in November 2017 to 0.5% and then again to 0.75% in May 2018. While we are not convinced on wage growth, the Bank has sent a strong signal that it is concerned the tightness of the labour market could lead to inflationary pressures over the medium term.”
“In turn, our FX strategists have also revised up their sterling forecasts: HSBC now sees GBPUSD ending 2017 at 1.35 and 2018 at 1.26 (up from a forecast of 1.20 for both years). This should bring inflation down a bit faster than we had previously expected: we see CPI inflation dropping to 2.4% y-o-y by end-2018, in turn relieving some of the pressure on the consumer.”
“Beyond the near term, the outlook is as uncertain as ever. The outcome of the Brexit talks could make the difference, in our view, between a recession and a return to 2014-16 growth rates of over 2%. Our central case here is underpinned by the assumption of a transition deal, perhaps of two to three years, during which time there is domestic political stability, and the UK seeks to negotiate a permanent free trade deal with the EU.”
“The upward revisions we have made to H2 raise our full-year growth forecast for 2017 by 0.1pp to 1.7%. Our forecast for 2018 rises slightly as well (from 1.4% to 1.5%), on the back of the reduced real income squeeze. In this edition of the quarterly, we also launch our first 2019 forecast of 1.6%. Again, this assumes a relatively smooth Brexit, but the rebound in growth is not as great as it might have been, due to the impact of the two rate rises on domestic demand.”
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