UK Likely To Witness Modest Growth If Positive Brexit Deal Reached: KPMG

The UK economy is expected to witness a modest growth if a positive Brexit deal can be reached with the EU, according to KPMG quarterly Economic Outlook Report.

KPMG opines that UK GDP will grow by 1.3 per cent in 2018 and 1.4 per cent in 2019. This will mark the lowest rate of growth since 2008 and 2009. These figures are based on an assumption that the UK government will achieve a relatively friction-free Brexit and transition deal.

If a disorderly Brexit were to occur, KPMG predicts a rapid slowing of growth to 0.6 per cent in 2019 and 0.4 per cent in 2020.

The report also finds that Brexit uncertainty is not the only factor inhibiting growth. Poor productivity continues to be a drag, and businesses are finding it increasingly difficult to recruit because of dwindling spare capacity.

The manufacturing sector is still seeing low export levels despite the weakness of the pound, and retailers, in particular, continue to face a challenging environment. In addition, despite high employment levels, the reports state workers can expect pay growth of around three per cent.

Yael Selfin, Chief Economist at KPMG UK, said, “Brexit will have a lasting effect on the UK, but economically it isn’t the only game in town. Issues such as improving productivity, reducing regional economic disparity, and ensuring that UK workers have the skills to meet employers’ needs should also be at the forefront of the Chancellor’s mind.  Bringing productivity growth back to pre-2008 levels alone could see the British economy grow by more than two per cent.

“If negotiations between the EU and UK result in a relatively friction-free agreement, then growth is likely to remain around 1.4 per cent in the medium term as a result of relatively weak productivity. If we see a disorderly Brexit, growth will obviously slow more dramatically. If negotiations end well, the MPC is likely to raise interest rates to one per cent at the tail end of 2019. If no deal is reached, the MPC will need to use interest rates to soften the economic impact.”

Monetary and Fiscal Policies

Uncertainty and risks around Brexit are likely to make the MPC cautious during the critical months ahead. KPMG predicts that rates will stay on hold until November 2019, with another 0.25 percentage point rise scheduled if Brexit negotiations proceed smoothly. Interest rates are likely to be cut to at least 0.25 per cent if negotiations are not successful, with additional measures to be announced by the BoE to ease any significant pressure on the banking sector.

UK Housing Market

The UK housing market will see moderate growth as prices start to rebalance across regions. KPMG UK predicts that house price growth will slow from 4.5 per cent in 2017 to 2.6 per cent in 2018, 2.0 per cent in 2019, and 1.6 per cent in 2020. High price levels, uncertainty around the future economic outlook, and rising interest rates are expected to take their toll in London and the South East especially. House prices in the capital are expected to drop by 0.7 per cent in 2019.

Across the UK, strong growth in the housing market is expected in regions with lower pressures on valuations, such as Scotland, where KPMG expects to see a growth of 4.9 per cent in 2018. In comparison, the housing market in London will continue to struggle, with gradual falls in house prices until 2021.