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UK economic outlook – and the
implications of Brexit
Dr Andrew Sentance
Senior Economic Adviser, PwC
CCN Annual Conference
Guildford, 7th November 2016
Outline
• Key trends in the post-crisis global/UK economy
• Brexit – causes and consequences
• Economic outlook for 2017 and beyond
• Implications for local authorities
The new normal
PwC
Slide 2
The world economy in the 21st century
World GDP, US $ trillion (current prices)
120
99
100
75
80
63
60
40
33
20
0
2000
2008
2016
2021
Source: IMF World Economic Outlook, October 2016
PwC
Slide 3
Global growth close to long-run trend
% per annum change in world real GDP and consumer prices
7
6
5
4
3
2
1
0
-1
2000
2002
2004
GDP growth
2006
2008
Inflation
2010
2012
2014
2016
1980-2010 GDP growth trend
Source: IMF World Economic Outlook, October 2016
PwC
Slide 4
Pattern of global recovery so far: 2010-16
2.1
Canada
Russia
UK
2.0
1.3
Germany
2.0
Ireland
5.6
Greece
France
US
2.1
-3.6
1.1
Japan
Mexico
0.3
3.0
1.2
Italy
Spain
China
-0.2
8.1
India
Key
x.x
7.4
= Ave GDP growth 2010-16
Brazil
South Africa
1.3
IMF World Economic Outlook, October 2016
PwC
Australia
2.6
2.0
5
UK currently leading G7 growth league
% annual GDP growth, year to 2016 Q2
UK
Germany
France
US
Canada
Italy
Japan
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Source: OECD Quarterly National Accounts
PwC
Slide 6
UK unemployment among lowest in EU
Unemployment rate in 10 largest EU economies, % of workforce
Spain
Italy
France
Belgium
Sweden
Poland
Austria
Netherlands
UK
Germany
Slide 7
0%
Source: Eurostat
PwC
2%
4%
6%
8%
10% 12% 14% 16% 18% 20%
So why did the UK public vote for Brexit?
Anti-globalisation backlash since the financial crisis
Immigration concerns
Lack of a positive EU agenda since 1990s
EU a scapegoat – not supported by UK politicians
Bad management of referendum campaign
PwC
Slide 8
Economic consequences of UK leaving EU
Uncertainty associated with an economic shock
(negative, short-term)
Disruption to trade and investment (negative,
medium/long-term)
Restricted migration from EU (mixed)
More regulatory freedom (positive, long-term)
Lower fiscal contributions (positive, but small)
PwC
Slide 9
Sterling – a long term view
UK effective exchange rate, Jan 2005=100
130
120
EER
110
100
90
80
70
Source: Bank of England
Ave 1980 - 2007
Ave 2009-2016
What has happened so far?
Pound has fallen – to c.$1.20-1.25 and around €1.10
Political turbulence – new PM; new gov’t formed;
opposition in turmoil; policy uncertainty
Increased business uncertainty. Confidence indicators
weakened in July but have since bounced back
Mixed economic indicators – consistent with slower
growth but not recession; inflation picking up
No clarity on exit process until plan is developed, Article
50 is triggered and negotiations begin
Despite general air of uncertainty, businesses continuing
to operate as normal, pending more policy clarity
PwC
Slide 11
How might uncertainty be resolved?
UK political situation stabilises (Now-End 2016)
Post-Brexit negotiating plan agreed (Early 2017?)
UK exit negotiations (2017-19?)
Implementation of EU exit agreement (2020/21?)
But many other uncertainties may emerge along the way:
 Negotiating stance of other EU members
 Possible General Election or second Referendum?
 Further political turmoil/instability in UK & EU
 Scottish/Irish independence issues
PwC
Slide 12
“Brexit means Brexit”strategy
 Priority is to control immigration
 EU regulation to be absorbed into UK law and then repealed or
amended in 2020s
 Single Market access – but not on current basis
 New UK-EU agreement based on ensuring market access for key
industries which have already invested heavily in UK (eg cars,
financial sector)
 Implies a more protectionist/interventionist approach to UK
business and industry than we have seen since 1970s
 UK will seek to strike trade deals with non-EU countries but
these will take a long time to deliver
 Government will aim to offset trade/investment downside with
other policies
PwC
Slide 13
UK long-term international migration
Net migration by country/region of origin, 000s
300
EU
Non-EU
UK
250
200
150
100
50
0
-50
-100
-150
Source: Office for National Statistics
PwC
Slide 14
Post-Brexit scenarios
Baseline scenario: UK takes 3-5 years to establish
new trading relationship with EU and other major
trading nations (FTA scenario)
Optimistic scenario. UK remains in European
Economic Area (EEA) and hence keeps closely
integrated with European trading partners.
Minimises business disruption and uncertainty
Downside scenario: High degree of political and
economic uncertainty creates a recession, and UK
has to fall back on WTO rules for trade with EU
partners and other countries
PwC
Slide 15
Economic scenarios for UK post-Brexit
Index of GDP, 2005 = 100
130
Pre-Brexit
Central scenario (FTA)
Downside (WTO)
Upside (EEA)
125
Impact on GDP by 2020 vs Remain
120
scenario = 1.5-5.5%; Central estimate = 3%
115
110
105
100
95
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Sources: ONS and PwC Post-Brexit Scenarios, updated for most recent data
PwC
Outlook for global economy in 2017
1.9
Canada
Russia
UK
1.2
1.0
Germany
1.4
Ireland
3.3
Greece
France
US
2.2
0.3
1.5
Japan
0.6
Italy
Spain
Mexico
2.5
China
1.0
2.3
6.5
India
Key
x.x
7.7
= GDP growth in 2016
Brazil
South Africa
1.0
PwC October 2016 Global Economy Watch
PwC
Australia
2.8
1.0
17
UK consumer spending relatively resilient
% per annum change in GDP and consumer spending
5.0%
4.0%
GDP
Consumer spending
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-5.0%
Source: ONS and PwC forecasts – updated from July 2016 Economic Outlook
PwC
Slide 18
Key implications for local authorities
UK economic growth likely to be disappointing for a
number of years, making the challenge of reducing the
deficit harder
Inflation set to rise, so possible increase in wage pressures
Government will want to offset Brexit downside to growth
– with selective increases in capital spending and other
supply-side measures
Devolution agenda likely to continue to be supported – but
partly as a means of controlling spending more effectively,
as well as a mechanism for economic rebalancing
Local authorities have important stake in key areas of
policy interest – eg transport, housing, skills, planning
Brexit is potential distraction for government – domestic
priorities may be affected by the EU exit agenda
PwC
Slide 19
More information and links
PwC UK Economic Outlook and Global Economy Watch:
http://www.pwc.co.uk/services/economics-policy/insights/uk-economicoutlook/ukeo-nov2015-economic-prospects.html and
http://www.pwc.com/gx/en/issues/economy/global-economy-watch.html
Blogs: http://pwc.blogs.com/economics_in_business/ and
http://andrewsentance.com/the-hawk-talks
Email: [email protected]
Twitter: @asentance
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