United Kingdom Country Risk Report Q4 2018
The triggering of Article 50 of the Lisbon Treaty in March 2017 will usher in a period of heightened political and economic uncertainty, particularly given new-found political instability following the June 8 snap election, and the UK government's ongoing intention to pursue a 'hard' Brexit – leaving the EU single market and customs union. A 'hard' Brexit with a transitional arrangement in place is our core view for how negotiations play out.
However, the hung parliament and Conservative minority government has simultaneously reduced the likelihood of a 'hard' Brexit and increased the likelihood of a 'disorderly' Brexit, in which the UK crashes out of the EU with no transition arrangement and falls back on WTO rules. In the absence of Conservative majority, the risk of parliament failing to approve the final deal agreed between the British government and the EU rises.
Preliminary post-Brexit data has proven resilient and the economy will benefit from an uptick in global trade in 2017. That said, the economy still faces massive headwinds from weak investment and productivity growth, and falling real income growth.
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.
The Bank of England (BoE) will keep its policy rate on hold at 0.50% through 2018. With inflation above target, the risk of additional tightening is non-negligible.
The government's fiscal austerity programme has reached the twilight hour. The ruling Conservative party's diminished parliamentary position, widely felt austerity fatigue, and likelihood that the economy will run out steam, suggest increased fiscal support over the medium term.
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