The repercussions of activating Article 50 and the start of formal negotiations, together with the outcome of the General Election on 8th June, are likely to increase uncertainty and political wrangling in the UK.
Information on the ongoing Brexit negotiations is opaque but signs suggest there is disagreement within the Cabinet. The absence of a majority for Theresa May further weakens her authority and negotiating position.
Centrist, and pro-European, Emanuel Macron has won a large majority in the French Parliament, going against the recent trend of the support of extreme parties although he is still a political novice. In September, Germany will hold a General Election, Angela Merkel has shrinking support but many predict she will remain as Chancellor with some kind of coalition Government. This would represent the status quo and is likely to bring an element of stability for Europe. The election in Germany has huge implications for Brexit negotiations given Germany’s prominent position within Europe.
Outside of Europe, relations between Russia and the US are worsening, partly because of tensions in the Middle East but also the accusations, which are gathering in terms of momentum and evidence, of Russian interference in the US presidential election. Furthermore, there remains considerable concern over the escalating situation between the US and North Korea and relations between Qatar and the surrounding Middle Eastern States.
All of which result in a volatile international outlook. The ONS estimates that the UK economy grew by just 0.2% in Q1 2017, the lowest across all G7 countries. This is in contrast to the end of 2016 when UK economic growth was the highest of the G7 despite the Brexit shock. The British Chamber of Commerce (BCC) estimate that Q2 growth was around 0.4% and are predicting a prolonged (c. 3 year) period of ‘anemic’ growth of 1.3% to 1.5% growth each year. Additionally, the IMF has reported that the UK economy will expand more slowly in 2017 and has downgraded it to 1.7% from earlier forecasted 2.0%, but remained at 1.5% for 2018.
The BCC report although business confidence could be lower there is still subdued growth particularly in the service sector and investment intentions remain low. This shows a cautious and uncertain business outlook, mirroring the position across economic commentators and highlights the need to get clarity on Brexit as soon as possible.
Rising costs for businesses (apprenticeship levy, business rates, living wage), coupled with the weak exchange rate, may still further impact the domestic market, both by increasing costs for domestic firms and making imports more expensive. The YoY growth of the CPI had been low throughout 2016; in November 2016 inflation was 1.2%. In 2017, however, this has been higher, with inflation above the Bank of England’s target rate (2%) for most of the year to date. Inflation is now at 2.6%, having peaked at 2.9% in May. This slight decrease should alleviate some of the pressure on the Bank of England to raise interest rates.
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