A leading French think-tank has revised its warning about UK economic growth post Brexit, after abandoning its support for George Osborne’s austerity plan.
Despite the evident weakening of the pound following the June vote, the OECD has nonetheless has reconsidered its stark warning. Further stimulus measures by the Bank of England helped produce better than expected performance in August, motivating the OECD’ to reverse their statement. The OECD now expects the U.K economy to grow by around 1.8 percent, a 0.1 point increase on pre-referendum predictions.
However the OECD said downturn in the economy may still be to come, with the effects delayed until next year. Indeed, Britain has arguably yet to feel the full force of the negative economic effects of the referendum result; the retail sector continues to perform well according to August data and sterling, although still weaker, has rebounded slightly in the aftermath of the initial financial market tremble.
The OECD maintained, “Whilst markets have since stabilised, sterling has depreciated by around 10 percent in trade-weighted terms since the referendum.”
Similarly, the extent of the damage has yet to be fully realised both in the global economy and more specifically the Eurozone. Markets will therefore be watching the movements of Theresa May’s new government intently in order to ascertain the direction in which Brexit negotiations may take. Currently there are very few clues on this, making it difficult to accurately and comprehensively assess the impact this may have upon economic growth.
Last week, the Bank of England confirmed that no further cuts are likely; however, there are indicators that the Bank of England may take further precautionary measures in November, such as lowering interest rate levels. Speaking about the proposed November assessment, the Bank of England committee has said “…if, in light of that full updated assessment, the outlook at that time is judged to be broadly consistent with the August inflation report projections, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year”.
Chancellor Phillip Hammond’s proposed Autumn Statement could also influence decisions. Hammond has thus far suggested higher spending may be a feature in the statement, proving a direct reverse of Osborne’s austerity measures and a move that until recently, the OECD had supported.
Nicole Jeary on 21/09/2016
