Country Forecast United Kingdom September 2017 Updater

Country Forecast United Kingdom September 2017 Updater

  • September 2017 •
  • Report ID: 4980633 •
  • Format: PDF


  • Following the snap general election on June 8th, in which the Conservative Party lost its parliamentary majority, the prime minister, Theresa May, formed a minority government based on a "confidence and supply" agreement with the Democratic Unionist Party (DUP). The government will be fragile and The Economist Intelligence Unit does not expect it to last a full five-year term; its working majority of 13 (down from 17 before the election) will be eroded by by-elections and it will face domestic and external challenges during the Brexit process.
  • The election outcome has made the political outlook in the UK more unstable and has increased uncertainty about the Brexit negotiations. Mrs May's position is greatly weakened and she will come under pressure from both Brexiteers and Remainers, which could make for a messy negotiation. Tensions within the cabinet and the Conservative Party over the government's Brexit strategy could come to a head, resulting in a political crisis and even the fall of the government.
  • Parliament approved Article 50 in March 2017, beginning the two-year process by which the UK will leave the EU. Mrs May said that the UK would leave the single market and the customs union, but her new government will face pressure to soften the terms of Brexit. The government will aim to reach a deal on the new UK-EU trading relationship by March 2019. At that stage the UK will leave the single market, and the terms of the new relationship will be phased in gradually. If negotiations fail and no extension of the deadline is agreed by all 27 EU members, the UK will leave the EU in 2019 without any deal in place and will revert to World Trade Organisation (WTO) trade rules.
  • The economy has been resilient in the wake of the Brexit vote. However, we expect growth to slow to 1.7% in 2017 as rising inflation and uncertainty about the Brexit negotiations dampen domestic demand. We forecast average real GDP growth of 1.3% per year in 2018-19 as the economy adjusts, picking up to an average of 1.9% per year in 2020-21.
  • We expect the government's budget deficit to widen to 3.6% of GDP this year, after narrowing to 3% in 2016 (from 4.3% in 2015). A deficit will persist throughout the forecast period (2017-21). We expect the UK's monetary policy stance to remain loose, but we now expect the Bank of England (BoE, the central bank) to raise interest rates in early 2021.


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