KPMG projects short term economic outlook for UK economy.
KPMG in the UK has revised GDP growth projections up as recent economic data points to a period of more subtle adjustment following the initial shock of the UK’s decision to leave the EU. KPMG now predicts UK GDP to grow by 1.7% this year and by 0.8% next year (up from 1.5% and 0.5% respectively).
These figures are based on analysis of key areas impacted since the result of the vote such as exchange rates, pressures on consumer spending, business confidence and investment decisions. The figures also take into account the recent Bank of England interest rate decision and quantitative easing measures implemented last month.
Nevertheless, with so much uncertainty about the future of the UK economy, KPMG has gone a step further to project two far bleaker scenarios to allow clients to stress test businesses plans should things take a turn for the worse:
The worst case scenario outlines a significant setback to the economy, with overall performance broadly similar to that experienced after the financial crash in 2008. In this case KPMG predicts UK GDP growing just 0.8% in 2016, before contracting by 4.8% in 2017.
In its second scenario, akin to the performance of the UK economy in the early 1990s, KPMG predicts that the UK economy would grow 1.2% in 2016 before contracting to 0.7% in 2017.
Yael Selfin, head of macroeconomics at KPMG, commented: “While we know little at present about the longer-term outlook, the short-term climate has shifted since the vote. There are signs that the blissful Indian summer may have also extended to the UK economy, with data released since the start of September pointing to a more subtle adjustment to Brexit than previously feared.
“This more encouraging outlook has led us to revise our forecasts upwards for 2016 and 17. But these are still early days. Clearly the greatest impact to the UK has been the implications of a lengthy period of uncertainty which means we are likely to see significant shifts in data and sentiment from month to month.
“While some businesses thrive in volatile times such as these, many are treading water while they wait and see what happens next. Planning at least for the short-term means companies can look for opportunities to take advantage of this new economic reality. For example, the weaker pound has already provided a boon to the UK tourism and manufacturing industries and lower interest rates that will stay low for longer could prove a good opportunity to refinance and invest for the longer term.
“With certainty likely to remain elusive for some time, we are advising clients to stress test immediate plans to ensure they are resilient to economic fluctuations. For those companies stuck in a post Brexit freeze, thinking through the scenarios could also help to thaw plans to move forward.”
Short term economic outlook
While the economy performed well during Q2 this is unlikely to be an accurate bellwether for future economic conditions in the UK. The uncertainty around the shape of Britain’s exit means we are likely to see significant shifts in data and sentiment from month to month.
For example, the prospects of a smaller internal market for those companies based in the UK are likely to hit investment with foreign direct investment the most vulnerable. Consumer spending may also falter as the prospect of meagre pay rises and higher inflation erode households’ purchasing power, and a fragile housing market and vulnerable pension pots put pressure on their wealth.
However, there is evidence that some businesses are starting to become less cautious on investment decisions, bolstered by positive short term export performance thanks to the lower pound.
Yael adds: “We are likely to see businesses walking something of a tight rope over the coming months as they try and balance a squeeze on profit margins versus higher prices of finished goods and services. Should the economy get weaker and demand more flexible, the more companies will be cautious in passing on costs to consumers.”
As such, KPMG have projected two short term stress scenarios to help businesses test their plans under increasingly worsening conditions:
In this first stress scenario KPMG projects a fall in consumer spending and investment also declining sharply. In this case, government spending would likely pick up slightly and exports would remain strong, but these together would not be enough to offset the shortfall in demand. As a result, in this scenario KPMG predicts that the UK economy would grow 1.2% in 2016 before contracting by a further 0.7% in 2017.
This stress scenario is somewhat akin to the performance of the UK economy in the early 1990s.
The second stress scenario tracks the outcomes of an even sharper contraction in investment and a more acute retrenchment by consumers. Despite a weaker pound, export performance would fall and imports are also curtailed in this scenario thanks to softer domestic demand. A significantly weaker economy would then put further pressure on government revenue, leaving little room for additional spending to boost the economy. In this worsening environment KPMG predicts the economy to grow by only 0.8% in 2016, before contracting by 4.8% in 2017.
This stress scenario represents a much more significant setback to the economy, with overall performance broadly similar to that experienced after the financial crash in 2008.
KPMG’s report ‘A new Brexit dawn for the UK economy’ outlines short term scenarios to for businesses to consider when planning ahead.
Notes to editors
The numbers above should be treated as indicative estimates only. The uncertainties involved point at potential risks weighted towards the downside. However, other scenarios such as a lower reduction in labour supply or a more resilient economy could see the impact of a Brexit on the UK economy reduced. Businesses may therefore wish to incorporate a broader range of scenarios for planning, and regularly update the economic scenarios as new data become available.
For further information please contact:
Jess Liebmann, KPMG Corporate Communications
Tel: 0207 311 3245
Mobile: 07551 135778
KPMG Press office
Tel: +44 (0) 207 694 8773
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff. The UK firm recorded a revenue of £1.96 billion in the year ended September 2015. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 174,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.