Brexit to send UK economy on a new lower growth path

26 August 2016

  • Current growth rate of 2.2 per cent for the year not expected to last
  • Brexit predicted to slow growth rate and increase inflation
  • Referendum result means UK economy will deviate historical pattern 
  • Judgement forecasts about future more important in uncertain times

Despite the UK economy picking up in the three months running up to the EU referendum the Warwick Buisness School Forecasting System (WBSFS) does expect Brexit to hit economic growth.

The Office for National Statistics confirmed a previous estimate that UK GDP growth was 0.6 per cent in the second quarter of 2016, compared to 0.4 per cent in the first quarter, giving the new Chancellor Philip Hammond hope Brexit won't adversely effect the economy.

Indeed, based on the latest data, the UK economy is currently growing at a rate of 2.2 per cent per annum with inflation at 0.6 per cent. But in the aftermath of the Brexit decision, professional forecasters, the Bank of England and the IMF have all updated their forecasts for 2017 - reducing the expected growth rate of the UK economy to values between 0.7 per cent and 1.3 per cent  and raising their inflation forecasts to two per cent.  

Related article: Western slow growth now the 'new normal'

In contrast, based on currently available data - very little of which is available post-referendum - the WBSFS suggests that, if historical patterns in macroeconomic data were to repeat themselves, UK economic growth would most likely continue at between two per cent and three per cent in 2017 and inflation would be between one and two per cent.

Comparison of the latest forecasts from the Bank of England, the IMF and the Treasury's panel of forecasters with judgement-free WBSFS suggests these forecasters expect Brexit will lead to the breakdown of historical patterns and relationships in macroeconomic data. Brexit is expected to change the UK’s economic growth and inflation paths.

Economic forecasting is hard enough at the best of times, due to inherent uncertainties, even when using past patterns in macroeconomic data to predict the future. But it is even tougher in circumstances such as Brexit, with the increased macroeconomic uncertainty expected to change historical patterns in the data. Accordingly, judgemental assumptions about the future paths of growth and inflation increase in importance.

Related course: MSc Finance

Ana Galvao, Associate Professor of Economic Modelling and Forecasting, said: “The Bank of England, the IMF and the panel of forecasters surveyed by the Treasury have all become much more pessimistic about prospects for GDP growth in the UK in the aftermath of Brexit.

"Their forecasts, in contrast to one quarter ago before the referendum, now clearly deviate from the WBSFS benchmark forecasts produced under the assumption that historical relationships and patterns in macroeconomic data do not break down in the aftermath of Brexit.”

James Mitchell, Professor of Economic Modelling and Forecasting, added: “What is especially uncertain is how the apparent increase in macroeconomic uncertainty, post-referendum, will affect relationships between official macroeconomic time-series. But what the WBSFS does reveal is that a change, and a change for the worse in terms of future economic growth, is expected due to Brexit.”

Related article: Inflation to be less than one per cent for next two years

Anthony Garratt, Professor of Economic Modelling and Forecasting, said: “The WBSFS also reveals that Brexit is expected to alter the future path for inflation in the UK. The Bank of England, Treasury and IMF are much more confident that inflation will turn out higher in 2017 than historical patterns in the data lead the WBSFS to suggest. Specifically, likely anticipating the effects of Brexit, all three forecasters expect inflation to return close to target in 2017.” 

For more details on the calculations by the WBSFS click here.

Professor James Mitchell teaches Managing in a New World on the Full-time MBA. Professor Anthony Garratt teaches Economics in the Global Environment? on the MSc Management course and on the Executive MBA, which is also taught at WBS London. He also teaches Empirical Applications in Macro, Financial and Energy Economics on the MSc Finance. Professor Ana Galvao teaches Economics for Management and Business and Forecasting for Decision Makers on the MSc Management course.

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