Yael Selfin, Chief Economist at KPMG UK, comments on today’s GDP figures for July
“After a rebound in economic growth in the second quarter of the year, today’s figures show that the UK economy picked up to 0.3% rate in July, pointing at a solid start to the third quarter.
“Today’s figures show that the manufacturing sector lost its mojo, with output contracting by 0.2% despite the low pound. The prospects of Brexit disrupting supply chains and hurting exports to the EU market are not a good omen. The construction industry also continued to lose momentum after a brief rebound in May.
“Wholesale and retail sales bounced back in July thanks to the good weather and inspiring UK performance in the Football World Cup, however the overall figures mask significant weakness within the sector, with increased demand for only a handful of items linked with the warmer weather, while more substantial household items remaining harder to sell.
“If a relatively friction-free Brexit and transition deal are reached with the EU, our estimates are that the UK economy will grow by 1.3% in 2018 and 1.4% in 2019. This will mark the lowest rate of growth since 2008 and 2009. However, if a disorderly Brexit were to occur, we predict a rapid slowing of growth to 0.6% in 2019 and 0.4% in 2020.
“Uncertainties and risks around Brexit are likely to make the Bank of England particularly cautious during the critical months ahead. We expected a pause before interest rates are raised by 0.25% in November 2019 to 1%. If Brexit negotiations fail, we expect rates to be cut to at least 0.25%, along with additional measures to ease any significant pressure on the banking sector.
“The chancellor will have limited flexibility in his Autumn Budget if he wants to keep to his target and not rock the boat on tax reform at least until Brexit terms are clearer. However, he may be tempted to look at taxes on the online sector and may wish to increase tax relief for innovation and R&D in support of the government’s Industrial Strategy. 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.”
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