United Kingdom Country Risk Report Q2 2019
Political focus in the early stages of 2019 will be wholly focused on preparing for Brexit, with domestic and foreign policy objectives falling by the wayside.
We at Fitch Solutions believe the most likely outcome remains a very soft 'Brexit in name only', akin to the Norway model. This prospect would get support from the EU and, crucially, would be the most likely Brexit deal to secure majority support in the House of Commons.
The UK's Q318 above-trend growth will unlikely continue in 2019. Lingering Brexit uncertainties will continue to weigh on corporate investment activity, while weakening consumer confidence will rein in private spending.
The UK's current account deficit will narrow over the coming quarters as a weaker pound boosts exports, sluggish growth weighs on imports and fiscal consolida-tion increases public savings.
While Brexit poses clear downside risks for growth, particularly in the short run, we also see potential upsides over the long term. However, it remains unclear what terms will define the UK's post-Brexit relationship with the EU, and thus how the referendum result will impact the potential growth of the economy.
A tight labour market will continue to exert upward pressure on nominal wages, but a concomitant rise in inflation will limit real wage gains, constraining private spending's contribution to real GDP growth.
We at Fitch Solutions maintain our view of one rate hike of 25 basis points (bps) in 2019 to 1.00% and one further rate hike of 100bps in 2020 to 2.00%. However, we cannot rule out a slower pace of monetary tightening or even an outright policy rate cut to cushion a likely economic fallout in the event of a hard Brexit (not our core view).
The UK's 2018 budget signals a break from the government's pledge to push through an austerity agenda.Major Forecast Changes
We have recently revised our average sterling forecasts. We now forecast the pound to average USD1.35/GDP in 2019, from USD1.45/GBP previously.
We now expect the current account deficit to come in at 4.0% of GDP in 2018, 3.5% in 2019 and 3.0% in 2020, from 3.5%, 3.1% and 2.8% previously, due to lower public savings.
There are downside risks to our economic growth forecasts, particularly stemming from the impact of Brexit-related uncertainty.
There is a low probability, but high impact, scenario of a 'disorderly Brexit', whereby the UK and EU fail to reach a deal by 2019 or a parliamentary rejection of the 'exit deal' results in the UK leaving the EU with no provisions in place to mitigate disruptive effects on the economy.United Kingdom Country Risk
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