UK in 2017: Faster now, slower later

Liz Martins, UK Economist at HSBC, notes that the UK has outperformed since the Brexit vote, relative to HSBC’s expectations.

Key Quotes

“GDP growth came in much higher than expected in Q3, with business investment contributing to growth and consumption continuing at a robust rate, despite the political uncertainty. Early indications point to a strong Q4 as well. We adjust our forecasts for this much higher base: we revise up growth for 2016 to 2.1% (from 1.8%) and for 2017 to 1.2% (from 0.7%).”

“Business and consumer reaction still to come

It’s not so much that the UK is out of the woods already. More, in our view, that the UK has not yet entered the woods. Businesses and consumers do not appear to have adjusted their behaviour, to any meaningful degree, following the Brexit vote.

Does this mean they are not going to? We think not. We continue to expect business investment to fall and consumption growth to slow, as real wage growth is eroded by rising inflation. But these trajectories begin later than we had previously expected. We then see a shallower recovery in 2018: we have marked GDP growth down from 1.6% to 1.3% for that year.”

“A rebalancing opportunity (so far) missed

If anything, the resilience of the UK economy reinforces our concerns for its long-term structural position. The currency has fallen 14% in a year. Yet consumer spending and borrowing continue to accelerate, the trade deficit continues to widen and the savings rate remains close to all-time lows. It is hard to see this continuing if, as we expect, real wage growth turns negative. And if the cheap credit powering consumption and the housing market were to dry up, things could look even worse.

Against this backdrop, we continue to see the Bank of England leaving policy unchanged throughout our forecast period (to end-2018). With inflation on the rise, we think it will fall to Philip Hammond and the public finances to provide any stimulus that is needed. After all, with the new, easier mandate announced last month, there is now leeway to do so.”

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