Global growth anxieties and EU referendum pose downside risks to UK economic growth in near-term

In the past few weeks, market sentiment in the UK has recovered along with certain improvement of the fears regarding the risks on the downside to the global activity. However, according to the survey evidence, these anxieties and a recent rise in the uncertainty regarding the upcoming EU referendum, pose risks on the downside to the UK domestic growth in the near-term. Meanwhile, the fundamental macroeconomic data implies that worries of a steep slowdown from the 2.2% growth in GDP during 2015 are overdone.

While manufacturing production continues to be weak, partially because of subdued exports, retail sales increased 5% y/y in January that was more than its long-run average. Furthermore, the deceleration in employment growth in the three months to January might have implied employer caution before the National Living Wage is introduced in April. The Office for Budget Responsibility expects the National Living Wage to affect 1.3 million workers, rather than a material decline in trading conditions.

“We expect growth to soften to 2.0% in 2016 on the back of a slowdown in business spending and continued fiscal austerity, as reflected in the Budget”, says Llyods Bank.

These impacts are likely to be partially countered by consumer outlays that should repeat 2015’s 3% growth, supported by strong real wage growth and declining unemployment. Meanwhile, favorable base effects have driven shallow rebound in annual headline inflation since November 2015 in spite of the relapse in oil prices since H2 2015.

“With Brent crude having recovered from its mid-January low of $26/bbl to around $40, these trends, alongside moderately strengthening domestic cost pressures, are set to underpin a rise in inflation to 0.6% to 2016 and 1.5% in 2017”, says Llyods Bank.