UK: Briefing sheet

Content Type
Country Data and Maps
Institution
Economist Intelligence Unit
Abstract
No abstract is available.
Topic
Politics, Summary, Outlook, Briefing sheet
Political Geography
United Kingdom

Political and economic outlook

  • The prime minister, Boris Johnson, has negotiated a revised withdrawal agreement with the EU, which would allow most of the UK to exit the single market and customs union after a transition period.
  • After being forced to request an extension of Brexit until January 31st, Mr Johnson did not believe that he had the parliamentary support needed to pass the bill unamended and to avoid a defeat. He sought-and secured-a general election, scheduled for December 12th.
  • The Economist Intelligence Unit's baseline scenario is that the Conservative Party will have an overall majority and that the UK will leave the EU on January 31st. The UK will remain in the transition period until 2022 as it negotiates a free-trade agreement
  • However, the situation remains highly uncertain. Major risks include the election returning a hung parliament, leading to a second referendum or a "no-deal" Brexit, and Mr Johnson failing to extend the transition period, leading to a disorderly exit after December 2020.
  • In our baseline scenario, we expect sterling to appreciate to $1.34:£1 in 2020, but to remain volatile as the risk of a no-deal exit persists, particularly in mid-2020 and late 2022. However, we expect sterling to reach $1.41:£1 by 2024.
  • We estimate that the looser fiscal policy will have caused the budget deficit to widen to 2% of GDP in full-year 2019 and forecast 2.6% narrowing in 2020. We forecast that it will contract in 2021, expand in 2022-23 to offset Brexit, and then narrow in 2024.
  • We expect the Bank of England (BoE, the central bank) to maintain current rates until 2020, gradually tighten them in 2021 and cut them in 2022 as the UK leaves the single market.
Key indicators
  2019a 2020b 2021b 2022b 2023b 2024b
Real GDP growth (%) 1.3 1.3 1.7 1.1 1.1 2.1
Consumer price inflation (av; %) 1.8 1.8 1.9 2.1 2.0 2.0
Government balance (% of GDP)c -2.0 -2.6 -2.3 -2.6 -2.6 -2.5
Current-account balance (% of GDP) -4.3 -4.6 -4.9 -5.6 -5.8 -5.3
Money market rate (av; %) 0.8 0.5 0.7 0.6 0.7 1.0
Unemployment rate (%) 3.8 4.0 4.1 4.3 4.3 3.9
Exchange rate £:US$ (av) 0.78 0.75 0.73 0.74 0.75 0.71
a Actual. b Economist Intelligence Unit forecasts. c General government.

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Key changes since November 4th

  • The BoE's monetary policy committee (MPC) voted to keep rates at 0.75%, but two members voted for an immediate rate cut, citing a faster timetable for Brexit. As a result, we now forecast that the BoE will cut rates once in 2020.
  • On November 11th the Brexit Party announced that it would stand down in all seats held by Conservative members of parliament, and its position in opinion polls subsequently declined. This increases the likelihood of an overall Conservative majority.
  • The Conservative manifesto outlines changes to government fiscal policy, including £2.9bn (US$3.8bn) in increased spending by 2024 and a scrapping of a planned corporation tax cut (to 17%). We have updated our fiscal policy forecast accordingly.
  • The Conservative manifesto has included a commitment to leaving the transition period with a free-trade deal in December 2020. Although we believe that it will be necessary to secure an extension, we highlight a disorderly exit as an increased risk.

The month ahead

  • December 10th-GDP (October): The UK avoided recession in the third quarter, growing at 0.3%. However, this was entirely owing to July growth, and August and September growth figures were both negative. Given the high level of Brexit uncertainty in October, there is a strong likelihood of a further contraction in October.
  • December 12th-General election: The Conservative Party's lead as at December 1st was 10 percentage points (as an average of public opinion polls), and we believe this will translate into a majority. However, if its polling lead falls below 7 percentage points, a hung parliament will become more likely
  • December 17th-Unemployment (October): After hitting an all-time high in July, labour force participation has declined in August and September. If it declined in October, this would suggest that the labour market has peaked.
  • December 19th-MPC meeting: The monetary policy stance that the BoE takes in this meeting will depend significantly on the outcome of the election, and how it perceives the likelihood of a no-deal scenario. We expect the BoE to hold rates steady at this meeting, but there is a risk of a rate cut.

Major risks to our forecast

Scenarios, Q3 2019 Probability Impact Intensity
Business and economic uncertainty over Brexit persists over the medium term Very high High 20
There is a disorderly "cliff edge" UK withdrawal from the EU High Very high 20
A second Brexit referendum intensifies political divisions High High 16
Another hung parliament produces an unstable government led by Labour Very high Moderate 15
Significant reform efforts are constrained by the UK's public finance position High Moderate 12
Note. Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential developments that might substantially change the business operating environment over the coming two years. Risk intensity is a product of probability and impact, on a 25-point scale.
Source: The Economist Intelligence Unit.

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