UK: Softer Brexit does not rule out economic slowdown

Country Report


The slowdown in GDP growth should accelerate in 2017


In 2016, in the aftermath of the Brexit vote, the UK economy managed to maintain its solid momentum. Indeed, political uncertainty was contained; the monetary policy response was proactive and fiscal policy was supportive; business and consumer confidence remained resilient; the stock markets were boosted by a weaker pound and the services sector continued growing. 


Yet, growth tumbled in Q1 2017, with GDP growing by +0.2% q/q (-0.7% excluding stocks) against an average of +0.6% q/q in H2 2016. The drag came from private consumption which slowed down significantly to +0.3% q/q after +0.7% in Q4 (its slowest pace since Q4 2014). Net trade contributed negatively to GDP growth by -1.4pp as exports fell while imports rose. 


Output in the services sector decelerated: +0.2% (against +0.8% in Q4 2016), recording its lowest figure since Q1 2015. Looking ahead, we expect UK GDP growth to slow down to +1.4% in 2017 from +1.8% in 2016 and to +1.0% in 2018. 


In 2016, business insolvencies reflected the economy’s post-Brexit resilience, decreasing by -1% compared to 2015. However, they have been on the rise for two consecutive quarters: +3.6% y/y in Q1 2017. We thus expect an increase of +5% in insolvencies for 2017 and +6% in 2018 (see Figure 2). 


The main culprits are the expected slowdown in GDP growth and pressures on margins which are linked to the rise in input costs. These are due to the sterling depreciation, in the context of high indebtedness.