As Brexit approaches, the UK economy is entering a period of unprecedented uncertainty. With prospects of a swift deal becoming ever more elusive, the probability of considerable short-to-medium term disruption is rising. The short-to-medium term outlook for the UK economy is clouded by major uncertainties around the form of UK’s exit from the EU, which is by far the most significant event in the economic and business calendar for some decades. It will impact the economy and business environment on multiple levels. With so little agreed so far, and so much at stake, businesses would be wise to plan well ahead for a range of potential outcomes.
Over the past few months, momentum in household consumption appears greater than previously expected, supported by the strong labour market and resilient household confidence. In contrast, business investment has been more subdued than previously anticipated, as the effect of Brexit uncertainty has intensified. Overall, investment is expected to be more affected than consumer spending by Brexit uncertainties , in particular in the shorter term while so much is still undecided. Though investment is then expected to resume in earnest at least temporarily in order to build the required new trading infrastructure once that’s made known.
The economic outlook will depend significantly on the nature of EU withdrawal. In the event that reason prevails, and the UK secures a Brexit transition period and a relatively friction-free trade deal, the Bank of England forecasts the economy growing by around 1.75% in 2019 . By contrast, a disorderly Brexit would likely cause a sharp deceleration in growth.
In regard to UK house prices, we see it entering a new phase of more moderate growth, with strong rebalancing between the regions. London is more acutely exposed to the repercussions of Brexit, with supply rising yet sales dropping owing to buyers’ anxiety around uncertainty leading up to March 2019. Londoners are also still paying the most in stamp duty, despite being the only region seeing house prices decreasing – down by 1% at the end of Q4 2018 – the opposite to what is being witnessed outside of the capital and Home Counties. So broadly, investing in property in London right now, we would say, is not the best bet. According to a recent KPMG UK Economic Outlook , in 2019 the price of homes in Scotland will rise among the fastest, while London, the South East and East of England will experience slower growth.
Overall, the challenges ahead call for a focus on improving the UK’s long-term productivity and inclusiveness, while helping shield the economy in the short term from Brexit related disruption.
What should you plan for?
Now more than ever would be good to have a Plan B and using two alternative scenarios could be a good starting point.
1. Disorderly Brexit
One of the largest risks to the short-term outlook is a potential disorderly exit from the EU as a result of a breakdown in UK-EU negotiations. Any unprepared exit from the EU will create significant short-term disruption. For example, delays at ports or a breakdown in supply chains leading to production stoppages are likely. With no other framework, trading relations will fall back to WTO rules. This in itself is a huge source of uncertainty as well as the potential for contractual disputes. According to the KPMG UK Economic Outlook , the pound would depreciate, in the range of 5-10% in this scenario. As in the aftermath of the referendum, this will lead to higher inflation, although the Bank of England is expected to ignore such a temporary spike and will most likely lower interest rates to 0.25% if not further. With the disruptions to supply chains expected to take some time to be resolved and businesses adjusting to new trading relationships, the full impact on the economy may only be felt by 2020 before the economy begins to gradually recover.
2. Positive productivity boost
According to the KPMG UK Economic Outlook , the other, more positive alternative scenario for the UK economy over the next few years is for an upside surprise to the rate of productivity growth, and this is in line with the UK’s drive to promote FinTech and AI sectors. The rate of productivity growth could rise due to the adoption of new digital technologies, such as machine learning and automation. As these technologies begin to diffuse to firms and workers, we could see a global surge in the rate of productivity growth. If these factors lift productivity growth by an additional percentage point per year, we could see the growth rate of the UK economy return to levels close to those in the era before the Great Recession.
As part of the above reasons, that’s why at Blend Network we have decided to stay away from the high-end of the property market in and around London, and instead focus across the UK regions where there is a shortage of more affordable homes. We believe in a turning market like today’s it is key to ensure you pick your strategies carefully. Lenders can register on www.blendnetwork.com, pick and choose from all available loans and start lending now from £1,000 to earn double-digit returns of up to 15% p.a. #LendWithBlend