NIESR Predicts Lower Economic Growth As Brexit Uncertainty Shows No Sign Of Subsiding

  • May 30, 2019 BST
  • Team Kalkine
NIESR Predicts Lower Economic Growth As Brexit Uncertainty Shows No Sign Of Subsiding

According to the latest report by the National Institute of Economic and Social Research (NIESR), a leading think tank, the Bank of England is likely to refrain from increasing interest rates until August 2020. The think tank cited ongoing uncertainty about Brexit and a slower global economy as the reason behind the forecast. NIESR pushed back by a year its previous forecast, issued in February when it has predicted a rate hike in August 2019.

Garry Young, an economist at the organisation, said that monetary policy around the world was getting impacted by a weaker global economy, which has a knock-on effect on global trade and oil prices. The uncertainty emerging out of Brexit has also kept the central bank in limbo regarding future actions and, therefore, kept the Bank of England on the sidelines. However, inflation pressure from rising wages due to tightening labour market would be offset by weakness in prices of imports.

The borrowing costs have been raised rates twice to 0.75 per cent from an all-time low of 0.25 per cent by the British central bank, but further increases have been put on hold by Governor Mark Carney, as the outlook for the economy is now shrouded in the "fog of Brexit." According to a poll, published last week, showed most economists believe the interest rate will be raised by the bank early next year.

Growth expectations have also been trimmed down by National Institute of Economic and Social Research to 1.4 per cent from its earlier forecast of 1.5 per cent. Moreover, the economy is expected to achieve growth of 1.6 per cent in 2020. However, the estimate was made with the assumption of "soft" Brexit, which will cause minimal disruption to companies by maintaining a high degree of access to EU markets and will avoid disturbance at the Irish border. The organisation warned that the growth prospects would be bleaker if Britain leaves the EU without a transition deal, or if the country ends up in a customs union with the EU, as favoured by the opposition Labour Party.

NIESR cautioned that the recent period of high economic and political uncertainty shows no sign of abating and would possibly intensify. It said that a change of government or new political alliances might be made as public dissatisfaction with national decision making is deep. The short-term economic outlook is now most affected by uncertainty: evidence from a survey suggests that 54 per cent of senior executives from participating businesses cite Brexit uncertainty as one of the top three sources of uncertainty, up from 37 per cent in the immediate aftermath of the EU referendum.

Due to Brexit-related uncertainty, the economy has remained unbalanced, with over-reliance of aggregate demand on consumers' expenditure, which is backed by an unsustainably low saving ratio. Business investment and exports have not been stimulated by a competitive exchange rate and low-interest rates. As a result, a higher share of aggregate spending has been met by housing investment and consumers' expenditure, which has resulted in aggregate borrowing to finance for aggregate investment. NIESR has predicted uncertainty would remain at elevated levels until the final form of Brexit is known.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

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