Is the UK really “shackled to a corpse”?

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Eurozone Economic Outlook

Incoming data suggests that the Eurozone’s economy continued to fire on all fronts in the third quarter of 2017. Industrial production surged in August, and economic sentiment surged to the highest level since 2001 high in October. In addition, the unemployment rate hovered at a multi-year low in August and robust external demand has boosted exports, despite a strong euro. All-in-all the economy is on track to record the fastest annual growth since before the financial crisis. On the political front, the situation has become more turbulent in recent weeks, which could increase uncertainty in the region. In Spain, an independence movement in Catalonia has led to clashes between regional authorities and the central government. Escalating tensions along with public demonstrations could take a toll on economic activity in the region in the coming weeks. Meanwhile, Austria shifted to the right in its 15 October elections, and Brexit negotiations have yielded little progress so far.

FocusEconomics analysts expect the Eurozone to grow a healthy 1.9% in 2018, which is up 0.1 percentage points from last month’s estimate. A stronger labor market should support robust growth as the common-currency bloc puts the crisis behind it. However, slower exports growth should take a bite out of the momentum. In 2019, GDP is seen expanding 1.6%.

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United Kingdom Economic Outlook

The UK economy continues to chug along, with both the manufacturing and services PMIs staying well in expansionary territory in September, and the unemployment rate at a multi-decade low. However, consumers are still smarting as higher inflation digs ever deeper into real wages, evidenced by disappointing retail sales in September. In order to boost the purchasing power of young people, the government recently promised GBP 10 billion to help them purchase a home, and announced a more generous system of tuition fee repayments. Clarity over how these new spending measures will be funded should come in November’s budget. On the international front, Brexit negotiations are at an impasse. In September, Prime Minister Theresa May outlined proposals for a two-year transition period, during which time the UK would enjoy unfettered access to the single market. However, talks on such a transition deal are yet to begin, with both sides still locking horns over a financial settlement. The longer the preliminaries drag on, the thicker the fog of uncertainty becomes, with consequent risks to investment.

Growth is likely to slow next year, with fixed investment paralyzed by the ever more pervasive uncertainty generated by Brexit. However, a stronger external sector and resilient global demand should cushion the slowdown. Our panelists estimate GDP growth of 1.3% in 2018, which is unchanged from last month’s forecast, and 1.5% in 2019.

Read more about the UK and the global economic outlook

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