Brexit and the outlook for the
UK economy
Dr Andrew Sentance CBE
Former member of Bank of England MPC
Senior Economic Adviser, PwC
Building Societies Association Conference
London, Wednesday 3rd May 2017
Outline
�Global and UK recovery – the story so far
�What does Brexit really mean?
�Outlook for UK and global economy
�Implications for Building Societies
The world economy is expandingWorld GDP, US $ trillion (current prices)
33
66
75
100
0
20
40
60
80
100
120
2000 2010 2016 2022
The new normal Slide 3
Source: IMF
Global growth close to long-run trend % per annum change in world GDP and consumer prices
Source: IMF World Economic Outlook, April 2017
-1
0
1
2
3
4
5
6
7
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
GDP growth Inflation 1980-2010 GDP growth trend
Slide 4
PwC
Pattern of global recovery so far: 2010-16
IMF World Economic Outlook, April 2017
Ireland adjusted to reflect domestic economy
Russia
Germany
UK
US
Brazil
India
Spain
Key
Canada
Mexico
South Africa
Australia
Japan
Italy
Greece
Ireland
France
2.2
2.1
3.1
1.3
0.3
1.1
2.7
2.0
2.0
-0.1
2.0
7.3
-3.6
2.6
8.1
1.4
1.5
x.x = Ave GDP growth 2010-16
China
5
UK unemployment among lowest in EUUnemployment rate in 10 largest EU economies, % of workforce
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Germany
UK
Netherlands
Poland
Austria
Sweden
Belgium
France
Italy
Spain
Slide 6
Source: Eurostat
Consumers supported growth in mid-2010s% per annum change in UK GDP and consumer spending
Source: Office for National Statistics
-6
-4
-2
0
2
4
6
2000 2002 2004 2006 2008 2010 2012 2014 2016
GDP Consumer spending 2000-2016 GDP Trend
Slide 7
… but the times they are a changing% per annum annualised increase in key UK economic indicators
Slide 8
0
0.5
1
1.5
2
2.5
3
3.5
GDP Services Manufacturing Employment
2014-16 2017Q1*
Source: Office for National Statistics * Based on most recent 6-months for employment
Inflation has caught up with wage growth% annual increase in average wages and consumer prices (CPI)
Source: Office for National Statistics
-1
0
1
2
3
4
5
6
Wage increases Price inflation (CPI)
… causing a sharp consumer slowdown% annual change in volume of retail sales, 3-month moving average
Source: Office for National Statistics
-2
-1
0
1
2
3
4
5
6
7Retail sales growth Average since 2011
… as a weak pound has squeezed consumersUK effective exchange rate, Jan 2005=100
Source: Bank of England
70
80
90
100
110
120
130
EER 1990-2008 Ave Ave since 2009
UK household saving rate – low and falling% of household disposable income available after deducting consumer spending
Source: Office for National Statistics
5
6
7
8
9
10
11
12
13
14
15
1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
Household saving fratio Average 1963-2016
Slide 12
UK household debt is edging up againHousehold financial liabilities as % of disposable income
Source: Office for National Statistics
90%
100%
110%
120%
130%
140%
150%
160%
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Debt as % of income Average 1987-2003
Slide 13
Economic consequences of UK leaving EU
�Economic shock creating investment uncertainty and
squeezing consumer spending (short-term)
�Impact on trade and investment flows – possible
disruption vs new opportunities (long-term)
�Negative impact on migration from EU (short-term
and long-term)
�More regulatory freedom (long-term)
�Lower fiscal contributions (long-term)
Slide 14
Economic scenarios for UK post-BrexitIndex of GDP, 2005 = 100
Sources: ONS and PwC Post-Brexit Scenarios, updated for most recent data
95
100
105
110
115
120
125
130
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Pre-Brexit Central scenario (FTA) Downside (WTO) Current forecast
Impact on GDP by 2020 vs Remain -
central pre-Referendum estimate = 3%;
latest forecast = 2.4%
“Brexit means Brexit” strategy
�Theresa May: key priority is to control immigration
�EU regulation to be absorbed into UK law and then repealed or amended in 2020s
�Single Market access – but not on current basis
�New UK-EU trade agreement likely to be based on ensuring market access for key industries which have already invested heavily in UK (eg cars, financial sector)
�Implies a more protectionist/interventionist approach to UK business and industry than we have seen since 1970s
�UK will seek to strike trade deals with non-EU countries but these will take a long time to deliver
�Government will aim to offset trade/investment downside with other policies (eg Industrial Strategy, tax and spending)
Slide 16
Article 50 negotiation – key issues
�Payment of exit contribution to EU budget to cover future liabilities (£20-60bn)
�People issues: rights of UK/EU citizens and future regime for immigration between UK and EU
�Trade in goods and services and access to UK and EU markets for key sectors – especially manufacturing and financial services
�Transition or implementation period
Slide 17
Post-Brexit world economy in 2030£trn at 2016 prices and market exchange rates
0 5 10 15 20 25 30
Spain
Canada
Russia
Mexico
South Korea
Italy
Indonesia
Brazil
France
UK
Germany
Japan
India
EU-27
US
China
Slide 18
Source: PwC World in 2050 Report, February 2017
PwC
Outlook for global economy in 2017
PwC April 2016 Global Economy Watch
Russia
Germany
UK
US
Brazil
India
Spain
Key
Canada
Mexico
South Africa
Australia
Japan
Italy
Greece
Ireland
France
2.0
2.2
1.5
0.4
1.5
3.8
1.6
1.5
1.0
1.0
7.3
1.6
2.7
6.5
0.5
1.1
x.x = GDP growth in 2016
China
19
2.3
UK economic outlook% per annum growth
Source: Office for National Statistics, HM Treasury Consensus and PwC Forecasts
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
GDP Consumer spending
Prospects for UK interest rates
�US interest rates now on a gradually rising trajectory
�Global economy set fair for reasonably healthy growth in 2017 and 2018, on current forecasts
�Despite projected slowdown in UK growth, unemployment rate expected to remain around 5pc, close to “full employment”
�Inflation rising – to around 3pc or higher later this year
�Household saving rate is falling, debt ratio is rising and house price inflation continues to outpace wage growth
�In the absence of a major shock to the world economy, UK rates should follow US policy of gradual rises
�2-3 percent UK Bank Rate remains a reasonable expectation for early 2020s – ie lower than pre-crisis interest rate level
Slide 21
Implications for Building Societies
• Period of slower UK growth and economic volatility in
prospect – with higher inflation and weak £
• Central scenario is this period of weaker growth and higher
inflation lasts 1-2 years followed by a return to 2% growth and
inflation - a good performance in the “new normal”
• Risk of a less satisfactory outcome remains, however, if Brexit
discussions with EU do not go well. This could prolong
disappointing growth into early 2020s.
• Financial services is a key sector potentially affected by Brexit
but a mass exodus from UK is most unlikely. UK gov’t will seek
to protect other sectors heavily invested in UK – eg car industry
• Despite reluctance of MPC, UK interest rates should follow US
in process of gradual rises – reaching c.2-3pc in early 2020sSlide 22
