The UK economy outperformed consensus last year, with growth looking set to finish at around 1.5%. This is much better than most expected and while by no means a record breaker points to some resilience in the face of historic change that begs the question how many other economies would perform so well in the face of such transformation?
While even the most ardent supporters of Brexit acknowledge a slowdown is inevitable as we transition from being a full member of the EU to ‘something else’ the obstacles will fade.
Indeed the strength of the pound (compared to the dollar at least) is helping the UK’s reputation as a safe haven. Furthermore, the progress made on Brexit negotiations will likely have lessened any uncertainty with business investment and hiring.
The UK looks set to enter a transition agreement with the EU from the March 2019 exit date through the end of 2020. During this time, little should change operationally for most firms (subject to negotiation of course), which will ease the adjustment. Unquestionably, uncertainty about a final agreement will linger, so it’s too early for a rebound of business investment. Still, the threat of a sharp near-term slowdown should diminish.
Another positive to consider is the external sector. The rising broad-based global economic growth we forecast, along with an under-valued pound, should enable net exports to boost domestic GDP expansion over the next couple of years.
The evidence points to a UK economy in the midst of recalibrating its trading relationship with the EU and the rest of the world. There are risks and most of these are understandably likely to surround how the government negotiates the next phase of Brexit. A deal is in both sides’ interests and the timetable is set which at the very least means the uncertainty cannot endure forever.
The UK, meanwhile, is not without supporters. President Trump, among others has been quick to reach out to the UK with further talk in Davos of trade agreements and mutual support. Speaking during a photo opportunity at the World Economic Forum in Switzerland, Mr Trump said the US and UK are “very much joined at the hip”. He boasted of a “really great relationship” with Mrs May and being “on the same wavelength in, I think, every respect”. Mr Trump told her: “It’s great to see you. One thing that will be taking place over a number of years will be trade. Trade is going to increase many times and we look forward to that.”
Traditionally the UK has always walked a tightrope between the US, Commonwealth and Europe. Historically, the balance shifts from time to time and this is one of those occasions.
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