Impact of EU exit on our UK industry forecasts

Abstract

We have lowered our forecast for UK economic growth following the vote to leave the EU on 23 June. GDP growth is now forecast at 1.1% in 2017 and 1.4% in 2018, and the medium‐term outlook has also been nudged down. We have also lowered our forecast for all of the main industrial sectors, with the biggest reductions in the long‐term forecasts for construction and manufacturing, although the weak pound could provide some short‐term boost to the latter. Our baseline forecast assumes that the government triggers Article 50 by the end of this year and that the UK leaves the EU by end‐2018. We assume that the government draws a red line under the freedom of movement and thus loses access to the single market. Trade relations revert to WTO rules. A number of factors determine the relative impact on each sector. First, in the short term, heightened uncertainty will hit business confidence, causing firms to delay capital spending. Second, less favourable trade relations with the EU could see export‐oriented sectors migrate production away from the UK. Finally, restrictions on migration will reduce the potential size of the labour force. Consequently, investment‐oriented sectors such as construction and machinery have seen some of the largest downgrades. Moreover, transport equipment is heavily exported to Europe, so increased trade barriers could see some production move out of the UK. Meanwhile, labour shortages could weaken growth prospects in labour‐dependent sectors. In addition, the vote has created uncertainties around the long‐term viability of London as Europe's major financial centre. The outlook for more consumer‐focused sectors is less downbeat, although an uptick in inflation may erode household purchasing power in the near‐term, and the multipliers from lower economic activity are likely to permanently reduce household incomes in the long term relative to our last baseline