UK: First signs of economic slowdown - Danske Bank

Analysts from Danske Bank, explained that while the UK was remarkably resilient to Brexit uncertainties during the second half of 2016, the economy has begun to slow, as negative real wage growth has hit consumption.

Key Quotes: 

“Both headline and core CPI inflation have risen significantly this year due to a combination of higher import prices and commodity prices. We expect inflation to remain high in coming years, as it takes some time for currency changes to feed fully into consumer prices. The reason we do not expect CPI inflation to move much higher now is a combination of missing wage growth and stabilising commodity prices. We think the underlying inflation pressure, as measured by wage growth, will stay muted, as we see limited room for significantly higher wage growth when GDP growth is slowing and the unemployment rate may stop falling.”

“We do not expect business investments to compensate for slower private consumption growth, as we believe firms will be more reluctant to invest due to Brexit uncertainties, so we think GDP growth will slow from 1.8% last year to 1.6% this year and 1.2% next year. Some have argued that growth may be spurred by the GBP depreciation through more exports but this has not been the case so far, as UK export companies are relying on imported inputs to production and input prices have surged.”

“We expect GDP to grow around 0.3% q/q per quarter throughout the forecast horizon. As growth is below trend, we still think it is likely that the unemployment rate will increase slightly.”

“We expect the Bank of England to remain on hold despite higher inflation due to growth concerns and high political uncertainty.”