UK growth be sluggish for the next few years even if a Brexit deal is secured, according to the National Institute of Economic and Social Research.
In a report Wednesday, the think tank lowered its estimate for growth this year to 1.5 per cent from 1.9 per cent, and said output will pick up only slightly to 1.7 per cent in 2020 and 2021.
“It’s not a collapse in the economy, but certainly there is a slowdown,” Amit Kara, head of UK macroeconomic forecasting at NIESR, told reporters in London. “There’s still going to be a period of uncertainty which will probably last for at least a year. It’s only then when we’ll know the exact relationship and that’s when the cloud of uncertainty will lift.”
Niesr’s central forecast is based on a scenario where the UK leaves the European Union at the end of March with an exit deal in place, leaving the economy limping along even if its most pressing barrier to growth is resolved. A more chaotic outcome could see investment tumble, pushing growth even lower, the think tank said.
With the UK scheduled to depart the EU in less than two months, Prime Minister Theresa May’s government has yet to get her exit plan through Parliament. That uncertainty has led to weaker business investment, while a depreciated pound hasn’t bolstered exports as much as expected, Kara said.
Still, low unemployment should continue to boost wages and help consumers, he said. If the UK leaves the EU with a deal, the Bank of England will likely raise interest rates in August, and continue to do so by 25 basis points every six months until the end of 2020 when bank rate reaches 1.5 per cent, according to the NIESR report.
The BOE announces a monetary policy decision and will update its forecasts for growth and inflation on Thursday, the same day May next goes to meet EU officials in Brussels. Governor Mark Carney has said a no deal Brexit could potentially push interest rates in either direction, but raising borrowing costs in such a scenario could cause the economy to collapse, Kara said.