MORGAN STANLEY: Get used to a 'new normal' of weaker UK growth thanks to Brexit

pulse

December 3, 2018 1:57 PM

Economists at the bank say growth has been hit by weaker domestic demand that looks set in for the long haul once the UK formally leaves the EU.

The economy looks as glum as the weather.

Brexit has been the key driver of UK economy, and lately it hasn't been good.

Specifically, growth has been hit by weaker domestic demand, a trend that analysts at Morgan Stanley say looks set in for the long haul once the UK formally leaves the EU.

In a note on Friday, the bank said it has softened its outlook somewhat, saying a "no deal" Brexit, which once was a coin-toss probability, now seems unlikely with a less than 20% chance. While the bank sees "multiple pathways" to Brexit following the Commons vote on the Brexit package on December 11, growth and business investment is expected to stay subdued.

"Growth has been hit by weaker domestic demand, linked to uncertainty over the UK-EU relationship impacting investment and higher inflation dragging on consumption, and is down by about a third since the referendum," Morgan Stanley economists led by Jacob Nell wrote in the note.

"Supply has been hit by weaker investment and the collapse in migrant – and particularly EU – labor supply, which has provided around 75% of UK labor supply growth over the last 15 years."

"Inflation was driven above target by the fall in GBP after the referendum, which increased the price of goods and services with a high import content," the bank's economists said. They see that leveling off into 2019, forecasting consumer and price retail indexes each hovering between 2% and 3%.

Average quarterly growth rate since the third quarter of 2016, when Britons voted to leave the European Union, through to the second quarter of 2018 was about 0.4%. Morgan Stanley expects that to continue into at least the fourth quarter of 2020.

See the chart below:

Since the referendum, a new normal of weaker growth BusinessInsider

Business investment has also taken a hit. The bank calls it "subdued ... despite returns holding at robust levels."

Subdued business investment since the vote BusinessInsider

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