UK: Brexit Taking More of a Toll - ING
James Knightley, Senior Economist at ING, notes that the UK growth
slowed to 0.4% QoQ from 0.6% in 4Q15 with the approaching referendum on
EU membership likely to be a key factor that is leading to a loss of
momentum.
Key Quotes
“UK 1Q GDP growth
came in at +0.4% QoQ yesterday, in line with market expectations, but
down from 0.6% QoQ recorded in 4Q15. The YoY rate of growth remained at
2.1%. At this stage we only get an industrial breakdown with service
sector output rising 0.6% QoQ, production industries falling 0.4% and
construction contracting 0.9%. The full expenditure data will be
released in a month’s time, which is likely to show a slowdown in both
consumer and investment spending.
We suspect that 2Q GDP growth
will be even weaker given the threat of Brexit is negatively impacting
business sentiment, leading to a reduction in risks appetite regarding
hiring and investment decisions. Indeed, unemployment actually rose in
the three months to February while consumer confidence is also coming
under pressure.
This loss of momentum means that the Bank of
England is likely to retain a dovish bias in the build-up to the EU
referendum. Should the UK vote to stay a member of the EU then we
suspect that activity will bounce back in 3Q and 4Q16, helped by a
weaker currency and a recovery in sentiment.
We therefore
suggest that a November rate hike remains possible. However, should the
UK vote to leave then sentiment and activity could weaken substantially
and lead the BoE to seriously consider significant policy loosening.”
