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Vote magnifies downward trend

Economy to ‘avoid recession’ following Brexit vote

scottish economyThe slowdown in growth already evident in the UK economy is set to worsen post-Brexit but a recession should be avoided, according to a new report.

UK GDP growth had already fallen from 3% in 2014 to 2% prior to the EU referendum. The Leave vote has magnified this trend, says PwC in its latest UK Economic Outlook report, with even more sluggish rates of 1.6% in 2016 and 0.6% in 2017.

PwC’s forecast of slowing growth is consistent with a report from the EY Item Club.

However, even the most pessimistic scenarios that forecast a growth rate between 1.5% and -1% in 2017 would still allow the UK to avoid a recession on the scale of that suffered in 2008-9 or the early 1980s, says PwC.

Other findings:

       The Scottish economy will continue to grow – and should avoid recession with 1.3% growth in 2016 and 0.3% growth in 2017 – but this is down from previous projections

·        Net exports face a boost over coming years from a weaker pound

·        Scottish home prices to fall slightly before recovering and rising in 2018 with first time buyers facing a slightly shorter saving period for their deposit. Property prices are projected to recover, rising to £156,000 by 2020.

From early 2017 UK GDP growth is expected to start recovering as the post-referendum fallout begins to settle.

The predicted slowdown is attributed to a likely slump in business investment, and a decline in overseas interest. Commercial property, construction, and capital goods are all sectors forecast to take a hit in the climate of post-Brexit uncertainty.

John Hawksworth, chief economist at PwC, said: “UK economic growth held up reasonably well in the run-up to the referendum and, while the vote to leave the EU was a major shock, we would expect the relatively flexible UK economy to adapt to this in the long term.

“But growth is likely to be significantly slower in the short term due to the political and economic uncertainty following the Brexit vote, which is likely to cause some business investment to be scaled down or deferred.

“Businesses need to hold their nerve through this unsettled period, take stock of the potential impact of Brexit on their markets and operations, and make contingency plans for alternative outcomes.

“They should also consider the longer term upside possibilities stemming from Brexit, particularly in terms of building closer trade relationships with relatively fast growing economies like China and India to offset any decline in trade with the EU27.”

 

Property for sale

Similarly, the housing market is expected to suffer a slowdown but avoid a major crash. UK house price growth is forecast to sink to 3% in 2016 and 1% in 2017.

However, house price growth is projected to begin recovering in 2018, with expected rates of 4% in 2018 and an average of 5-6% per annum in the long term. This is thanks to demand continuing to outstrip supple, meaning that on average house prices will keep rising faster than earnings.

PwC estimates that average UK house prices in 2018 could be 8% lower than if the UK had voted to stay in the EU (although this would still leave them 8% higher on average than in 2015).

But the estimated impact of Brexit varies greatly by region: in London average house prices could be around £60,000 lower due to Brexit by 2018, in contrast to a reduction of £10,000 in Scotland and just £8,000 in the North East.

Richard Snook, senior economist at PwC, said: “We think there are four main reasons why the Brexit vote will lead to a slowdown in the housing market in the short term: the deterrence of foreign investment, uncertainty regarding the future of EU nationals living in the UK, a reduction in consumer confidence, and turbulence in the banking sector.

“While these factors will weigh heavily on the market in the short term, we expect a gradual recovery from 2018 onwards as market fundamentals reassert themselves.”

Consumer spending growth is forecast to fare slightly better, falling to around 1.3% in PwC’s most likely economic scenario in 2017. Reasons for this include a weaker pound inflating import prices and therefore cutting the real spending power of UK households.

In addition, lower consumer confidence levels and slower jobs growth are also expected to reign in spending. However, a weaker pound will prove a boon to net exports, which should start to positively contribute to the economy by 2017.

 

 

 

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