ICAEW: Brexit not as bad on economy as expected

  • June 14, 2019
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The ICAEW said Brexit uncertainty has not affected the UK economy as expected – though it warned a no-deal Brexit must be avoided.

“As long as a ‘no-deal’ Brexit is avoided,” commented Michael Izza, CEO of the ICAEW, “history suggests that the current ‘new normal’ of elevated uncertainty may not impact as much as some expect.

“Of course, cuts in investment by some businesses in response to uncertainty are unlikely to be reversed, even once the UK’s departure from the EU has been resolved. But if policymakers remain on the ball, the overall macroeconomic effect of the Brexit limbo businesses currently find themselves in should be manageable,” said Izza.

While Brexit continues to dominate headlines in tandem with the Tory leadership race, the ICAEW says overall economic growth is expected to increase from 1.3% to 1.5% in 2019.

The organisation puts that down to “an effective response” from the Bank of England, keeping interest rates low and the Government relaxing fiscal austerity via tax cuts and extra public spending.

The ICAEW’s Economic Forecast made the following observations.

Faster growth in Q1 supported by ‘no-deal’ preparations

A 0.5% rise in GDP in Q1 was an improvement on the previous quarter’s sluggish 0.2% gain. However, a surge in manufacturing output suggests that the economy enjoyed temporary support from businesses stockpiling at the end of March.

With an extension of the Brexit deadline to 31 October, an unwinding of the stockpiling effect suggests growth will have fallen back in Q2. The forecast has been upgraded to 1.5% from 1.3% three months ago. But given that ‘no-deal’, ‘deal’ or yet another Brexit extension all remain realistic possibilities, it makes forecasting uncertain at the moment.

Business investment breaks a long-running fall

Having dropped in each quarter of 2018 (outside recessions, the longest continual decline since records began), business investment saw a surprise 0.5% rise in Q1 2019.

However, the same ‘no-deal’ worries which encouraged stockpiling may also have played a role in temporarily raising business investment in the form of warehousing and logistics. The underlying trend is still negative though, dragged down by ongoing political uncertainty.

Unemployment to remain low while pay growth stabilises

An unemployment rate of 3.8% in the first quarter of 2019 represented a near-45 year low, while the employment rate touched a joint-record high in the same period.

The flexibility of the UK jobs market should support further jobs growth, but at a slower pace than recent years. However, the recent revival in pay growth appears to have reduced slightly to 3% year-on-year. This is expected to continue over the remainder of 2019.

Uncertainty continues to hit investment

It is very clear that heightened Brexit-related uncertainty is weighing on business sentiment. However, outside business investment, the real economic impact of periods of elevated political uncertainty is hard to identify.

Appropriate monetary policy by the UK Government should be able to reduce the drag on demand and the role of uncertainty as a “whipping boy” in economics should be regarded with caution.

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ICAEW: Brexit not as bad on economy as expected

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