The Bank of England held off on raising interest rates at its September meeting, citing the greater uncertainty about future developments in the European Union withdrawal process.
The central bank’s staff reported that businesses were tightening cost controls and holding off on investment ahead of Britain’s March 29, 2019 deadline for withdrawal from the EU.
Governor Mark Carney has had his term extended until January 2020 to help smooth the post Brexit transition. Carney, in line with most economists, understands that if Britain exits the EU without a trade deal the economy would suffer a real squeeze on the investment and consumer incomes front.
Nonetheless, the central bank believes the economy is running close to full capacity. Growth in the British economy slowed to a 1.3% y/y pace as of the second quarter of 2018. The CPI inflation rate was 2.5% in July and the unemployment rate dropped to 4% in May.
The BoE’s forecast for growth this year is a slow 1.4%, below the 2% projected growth rate for the Euro Area.
UK wage growth has been steady in recent months, but consumers have recently been experiencing inflation running in the same range. In other word, real wage growth has been effectively zero in the UK.
Brexit Has Clouded Outlook for The UK Economy In 2019
Official organizations are reluctant to offer projections for the UK economy beyond 2018, since the outcome of the Brexit terms are not known.
The European Commission projections for 2019, which are set out below, are based on the purely technical assumption of status quo in terms of trading relations between the EU27 and the UK.
The status quo projections suggest a weak at 1.2% GDP growth rate in 2019. Clearly the risks to the 2019 baseline forecast for the British economy are large and predominantly to the downside.
The European Commission Status Quo Projections for The UK Economy
