Economic outlook, analysis and forecasts

United Kingdom - Economic forecast summary (November 2016)

 

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The Brexit referendum vote has reduced growth prospects and increased volatility, as reflected by the large currency depreciation. Monetary policy has mitigated the immediate impact of the shock by stabilising financial markets and shoring up consumer confidence. This projection assumes the United Kingdom will operate with a most favoured nation status after 2019, but there is considerable uncertainty about this, which will increasingly weigh on growth, and in particular private investment, including foreign direct investment. Higher inflation is projected to hit households’ purchasing power and to reduce corporate margins, weakening private consumption and investment. As growth slows, the unemployment rate is projected to rise.


Macroeconomic policies need to be expansionary. Inflation is set to exceed the target of 2%, but the monetary policy stance is expected to be unchanged as the inflationary impact of currency depreciation should be temporary. The latest government plans released in the Autumn Statement indicate a slower pace of fiscal consolidation and some increase in public investment. A more significant increase in public investment would support demand in the near term and boost supply in the longer term. With a weak economic outlook, further raises in the minimum wage should be considered prudently.


Despite recent increases, long-term interest rates remain low, creating fiscal space as debt service obligations fall. Reducing tax expenditures and adopting a single VAT rate would improve both efficiency and fairness, but would require flanking policies to protect the poor. More spending on physical infrastructure and skills in regions lagging behind would raise productivity and wages, making fiscal policy more inclusive.

 

 

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Other information

Economic Survey of United Kingdom (survey page)

The Economic Consequences of Brexit: A Taxing Decision (main web page with paper)

 

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