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MORGAN STANLEY: Get used to ‘new normal’ of weak UK growth post Brexit

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london rain
The
economy looks as glum as the weather.

REUTERS/Kevin Coombs

  • Morgan Stanley says weaker growth looks set in for the long
    haul once the UK formally leaves the EU.
  • The average quarterly growth rate since the third quarter of
    2016 was about 0.4%, which looks set to continue until at least
    the fourth quarter of 2020, economists at the bank said. 
  • In the three years before the referendum, that rate was about
    0.6%.

Brexit has been the key driver of UK economy, and lately it
hasn’t been good. 

Specifically, growth has been hit by weaker domestic demand, a
trend that analysts at Morgan Stanley say looks set in for the
long haul once the UK formally leaves the EU.

In a note on Friday, the bank said it has softened its outlook
somewhat, saying a “no deal” Brexit, which once was a coin-toss
probability, now seems unlikely with a less than 20% chance.
While the bank sees “multiple pathways” to Brexit following the
Commons vote on the Brexit package on December 11, growth and
business investment is expected to stay subdued.


Read more:
Here’s what happens next in Brexit

“Growth has been hit by weaker domestic demand, linked to
uncertainty over the UK-EU relationship impacting investment and
higher inflation dragging on consumption, and is down by about a
third since the referendum,” Morgan Stanley economists led by
Jacob Nell wrote in the note.

“Supply has been hit by weaker investment and the collapse in
migrant – and particularly EU – labor supply, which has provided
around 75% of UK labor supply growth over the last 15 years.”

“Inflation was driven above target by the fall in GBP after the
referendum, which increased the price of goods and services with
a high import content,” the bank’s economists said. They see that
leveling off into 2019, forecasting consumer and price retail
indexes each hovering between 2% and 3%.

Average quarterly growth rate since the third quarter of 2016,
when Britons voted to leave the European Union, through to the
second quarter of 2018 was about 0.4%. Morgan Stanley expects
that to continue into at least the fourth quarter of 2020.

See the chart below: 

 


Since the referendum, a new normal of weaker growth
Since
the referendum, a new normal of weaker growth

Morgan Stanley

Business investment has also taken a hit. The bank calls it
“subdued … despite returns holding at robust levels.” 


Subdued business investment
Subdued business
investment since the vote

Morgan
Stanley


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