OctaFX | OctaFX Forex Broker
Open trading account

UK: Brexit uncertainties dominating theme - Danske Bank

According to analysts from Danske Bank, growth in the UK is set to remain weak. They estimate a base case with no rate hikes in 2018.

Key Quotes: 

“Inflation remains high and wage growth is in our view unlikely to pick up significantly, meaning real wage growth will remain under pressure, limiting how much private consumption can grow. Brexit uncertainties remain high, as the UK and the EU have not even agreed on a transition period right now, which are likely to weigh on business investments. Exports growth has risen but that is mainly due to increasing growth in the rest of Europe and not to a boost from the weaker GBP. The government is unable to stimulate the economy through expansionary fiscal policy, as government deficits and debt are already high. We forecast growth of 1.3% in 2018 and 1.2% in 2019 but stress that uncertainty surrounding our forecast is higher than usual due to Brexit.

We forecast CPI core inflation will fall slowly over the forecast horizon, from 2.7% currently to 2.2% at the end of 2019. We expect headline inflation to run below core inflation, as the positive contributions from energy and food diminish. Although we expect inflation to remain elevated, we do not think the underlying inflation pressure is high, as nominal wage growth remains subdued. Inflation expectations are also well-anchored and not out of control, despite higher actual inflation.”

“The labour market has proven to be quite resilient to slower growth and Brexit uncertainties and the unemployment rate has fallen to 4.3%, the lowest since the 1970s. However, this is not the same as saying Brexit has not had an impact, as the higher inflation, driven by the weaker GBP, corresponds to a defacto wage cut, as real wage growth has turned negative again. So instead of firms letting people go, wages have taken the adjustment instead. In our view, it is difficult to see a pickup in nominal wage growth right now.”

“While it is positive for GBP that the negotiations are moving forward, it is still too early for the markets to price out the Brexit risk premium, as there are still many unresolved issues about what Brexit really means, even when phase 1 is concluded.”

Our base case for Brexit remains that the UK and the EU will reach a deal on a transition period (two to three years) eventually but that it is unlikely that a full deal will be reached before March 2019. We expect the final deal to look something like the EU-Canada CETA deal, which reduces/removes trade barriers for goods but is weak on services. The longer it takes to conclude the negotiations (and agree on a transition period), the greater the risk that the uncertainty will hit the economy.”

“Despite slower growth, the Bank of England raised the Bank Rate to 0.50% from 0.25% at its meeting in November, as it has become more concerned about the combination of high inflation and low unemployment. Overall, the Bank of England kept its flexibility on further rate hikes in 2018 and said it will ‘monitor closely’ incoming data. We still believe the rate hike was about taking back the emergency cut from August 2016 just after the Brexit referendum and not necessarily the beginning of a new hiking cycle. We think the Bank of England is too optimistic on wage growth (and hence underlying inflation) and that it does not want to tighten monetary policy too much relative to the ECB, so our base case right now is no further rate hikes in 2018.

WTI drops 1.5% on Monday on heightened expectations of rising US output

The positive impact of OPEC's decision to extend the oil output cut until the end of 2018 on crude oil prices didn't last long. After failing to refre
Read more Previous

US: tax bill will likely be passed in Q1 2018 - Wells Fargo

Analysts from Wells Fargo, see the final tax reform bill looking more like the Senate bill than the House bill, given the very tight vote margin ...
Read more Next
Start livechat