U.K. Outlook: It’s Not Just Brexit


  • Our base case is for a relatively stable economic backdrop and cooperative Brexit.
  • We expect the Bank of England to raise interest rates slowly over the next few years.
  • Risks to our outlook include Brexit uncertainty, rate-hike consequences, and on the positive side, an unexpected improvement in productivity growth.

When looking at the medium-term outlook for the U.K., it is tempting to focus solely on Brexit. It is undoubtedly a key component of the U.K. outlook, but there are a number of other factors investors should consider when constructing their medium-term view. Not least are how the economy behaves as we move through the monetary tightening cycle, whether politicians will be able to avoid the temptation of fiscal easing against a backdrop of continued income and wealth inequality, and how policymakers would respond in the event that the base case of low productivity growth and stable inflation is challenged. There is a lot more to the U.K. outlook than Brexit, important though it is.

Initial conditions

Before we look to the future, it is important to recognize initial conditions and anticipate how they may evolve. As with many other developed economies, the U.K. has enjoyed a prolonged period of steady growth, characterized by falling unemployment but disappointingly sluggish wage and productivity growth. The total number of people employed is a record-high 32.4 million, the unemployment rate is a 50-year-low 4.2% and government finances are moving back into balance.

However, average earnings for workers are rising at just 2.5% per annum, and with Consumer Prices Index (CPI) inflation at 2.4% and the household saving rate back at just 4.3%, household finance remains under pressure. It is this pressure that has been the primary cause of the recent slowdown in GDP. As we look to the future, the key questions we need to address are: What scope is there in other parts of the economy to support the recovery, and if we see a global slowdown, how well equipped is the U.K. to weather that particular storm?

Figure 1- U.K. GDP is Declining