While inflation in the UK has generally been higher than in European countries that make up the Euro-zone, due primarily to more buoyant economic conditions since 2011, it has always been associated with higher growth. However, following the Brexit referendum inflation continued unabated, while growth has declined.
In October of last year, we reported how UK inflation reached a five-year high of 3% for the year. Looking forward to 2019 with a no deal-Brexit looming large on the horizon, even with the maintenance of the current status quo of a single market and customs union membership, it is highly unlikely that we will see much growth.
The effects of Brexit were not immediate, yet the June 2016 referendum almost immediately impacted the pound’s exchange rate and effectively the terms of trade between Europe and the UK. Moreover, Schroeders Senior Economist, Azad Zangana claimed in the Morningstar how there was an 82% fall in inward forward direct investment towards the end of 2017, which was in stark contrast to the surge in direct foreign investment immediately following the fall in the pound after the referendum. The reason, Mr. Zangana notes, is that in the months and years following the referendum, pessimism and gloom took hold, with the market preparing for the worst possible scenario.
Despite the low growth projections, however, the Organisation for Economic Cooperation and Development (OECD) projects a slight increase in 2019 before slowing down next year, vis-à-vis the Euro-zone, with inflation projected to converge to around 2% by the end of 2020. This is in line with the forecasted consumer price index (CPI) rate, which measure inflation and changes in purchasing trends of consumer goods and services.
A detailed Economic Calendar published on FXCM notes how previous projections showed a CPI of 2.1%, year on year, with the upcoming figures to be released by the National Statistics office on 13th February. Nevertheless, the upcoming CPI for January 2019 is predicted to remain around 2.1% for the remainder of the year.
Meanwhile, to encourage growth and avoid compounding the economic situation the Bank of England (BoA) only increased its borrowing costs to 0.75% from 0.5% last August and abandoned it’s planned hike for December 2018.
However, it warned that once Brexit is resolved there may be further hikes in 2019 to curb inflation rates. Senior economist with PwC, Mike Jakeman told The Guardian that it will be Brexit that will ultimately determine the BoA’s next move. He goes on to say that assuming a reasonably smooth transition, the BoA is expected to hike interest rates just the one time in 2019.
Economy Chilling Effect
Quoting a growing tightness of the labour market, which has pushed wage growth higher than previously anticipated, the BoA notes that market factors overall indicate a slowing growth. For all the uncertainty caused by Brexit, one thing is certain; Brexit has had a chilling effect on the economy and has wreaked havoc in an already volatile market. At this point regardless of what kind of Brexit we will see, none of the options are favourable for UK growth.