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Brexit puts the brakes on the economy

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The British economy put in another weak performance in the second quarter of 2017. In a gradual process the UK will have to bid farewell to the high economic growth rates registered in recent years. Average quarterly growth will more than halve in 2017 compared with last year. In the long run Brexit does not have to be a disaster for the UK economy, but we expect the exit from the EU to cause significant economic damage during the transition phase.

Allianz SE
Munich, Jul 26, 2017

According to the flash estimate published today, the British economy grew 0.3% q-o-q in the three months to June after 0.2% q-o-q in the previous quarter. The service sector provided the only positive contribution to growth (+0.5 percentage points). No breakdown of components is available yet, but higher frequency data suggests that private consumption was the main – albeit weakening – engine of growth in the second quarter.

The negative impact of the Brexit vote on the British economy is becoming increasingly clear. The initially feared slump in economic activity in the immediate aftermath of the referendum did not materialize, but instead the UK will have to say goodbye to the high growth rates of recent years in a gradual process. Since the turn of the year 2016/17 the British economy has cooled markedly. Especially the elevated uncertainty surrounding the outcome of EU exit negotiations and the sharp acceleration in consumer prices – as a result of the  marked depreciation in sterling – are weighing on economic activity. In the current year average quarterly growth will more than halve from 0.5% q-o-q to 0.2% q-o-q. Overall we expect UK GDP growth to slow to 1.4% in 2017, down from 1.8% in the previous year. With growth in the eurozone approaching 2% this year, the UK economy will clearly fail to keep up.

In the medium to long term the economic impact of the Brexit vote will largely depend on the outcome of the negotiations with the EU, an immensely complex process that will take years to complete. A free trade agreement between the EU and the UK, with considerable sectoral add-ons – in particular for services – is still the most likely scenario for us. But the agreement will fall well short of the degree of integration that has been achieved within the European Single Market. Key pillars of Britain’s economic success – such as the financial services industry – could lose some of their importance going forward. Brexit does not have to be an economic disaster in the long run, but the UK’s economic model will have to adapt to new conditions – with access to an EU market with more than 450 million people at least partially restricted – which will cause economic costs at least during a transition phase.

 

 

 

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