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UK in transition: the uncertainty principle

Key points:

  • UK growth has been on a downward trend in recent years. Persistent uncertainty surrounding the outcome of Brexit negotiations, weaker external demand and rising protectionist risks mean conditions for growth will remain tough.
  • The process of exiting the European Union (EU) is likely to persist as the main influence on the economy for a long time. Our base case is that the UK will eventually land not far from its pre-Brexit status, but the process is likely to be bumpy and drawn out.
  • In this scenario, growth is likely to be lacklustre, reflecting a decline in economic potential. The supply side of the economy has weakened, reflecting poor productivity growth and unfavourable demographic dynamics.
  • The Bank of England will probably maintain that a gradual and limited hiking cycle remains appropriate. But further tightening will be conditional on a smooth Brexit transition, an assumption that could unravel.
  • The policy mix is likely to change, with the fiscal lever taking the front seat at the expense of monetary policy, especially in a no-deal Brexit scenario. The government has already softened its stance on fiscal austerity and the upcoming budget could see further easing.
  • Irrespective of the type of Brexit that eventually emerges, UK policymakers must ensure that tackling low productivity growth remains at the top of the agenda.

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