The state of the UK economy following Brexit

Question

What is the current state of the UK economy?

Answer

Following the deep recession in 2009, The UK’s economy began recovering and grew by 2.6% in 2014, the fastest pace since 2007 and up from 1.7% in 2013. In 2015, GDP growth was down markedly, as both the manufacturing and construction sectors struggled with uncertainty. In 2016, Q2 saw the economy expand by 0.6% in the months leading up to Brexit. The biggest contributor to growth was household consumption. Following Brexit, consumer confidence improved in August, though it remains below pre-Brexit levels. As the pound tumbled, goods exports rose 3.4% between June and July. The ONS reported that the rise in exports and drop in imports in July helped narrow the UK’s goods trade deficit. The economy looks likely to have grown 0.1% in the third quarter (IHS Markit 2016). Since 2009, The Bank of England’s Monetary Policy Committee has kept interest rates at the record low of 0.5%. However, this changed in August 2016 when the rates were cut to 0.25%. This was a measure to stimulate the UK economy, along with some quantitative easing, with the MPC warning that rates could go lower if the economy worsens. The low interest rates have shattered optimism among investors and this might affect the exchange rate negatively. Brexit caused a major decline in the pound against other currencies due to uncertainty. The average annual inflation rate from 2011-2015 was 2.2%. Consumer prices rose 0.6% in the year to August 2016 amid a weaker pound. Transport prices rose further and cost of food fell at a slower pace while lower prices for housing and clothing weighed on inflation. As of July 2016, the government debt amounts to 83.7% of total GDP; this is large and growing quickly by historic peacetime standards. However, uncertainty over Brexit means that the economy is subject to volatility.

References

IHS Markit (2016) Markit/CIPS UK Services PMI: UK services economy rebounds in August. Available via: https://www.markiteconomics.com/Survey/PressRelease.mvc/3de4f3638ea3472bb7b986ebe0b9931d ONS (2016) Available via: https://www.ons.gov.uk/