The impact of the UK election on the UK economy, Chief Economist of Swiss Life Asset Managers, Marc Bruetsch gives his opinion
Growth outlook UK: For the time being we leave the outlook unchanged (real GDP growth 2017: 1.5%; Consensus:1.7% 2018: 1.0% vs. Consensus 1.4%) as we first want to have a clearer picture on the sustainability of the renewed Sterling weakness. What makes things even more complicated is that the composition of Q1/GDP was not what one would expect under current circumstances (weak export contribution and strong business investment spending instead of the expected opposite). So, potentially Q2 will see a certain reversal of what we saw in Q1 which makes things extremely difficult to predict. Business sentiment continues to be robust and that should not change after the election in my view
Inflation: Here, a prolonged Sterling weakness would mean that the inflation cycle would peak later and at a higher annual rate than currently anticipated. For the time being, we expect inflation to peak at 3.1% by October this year and our forecast for 2018 was below consensus so far. (average annual inflation HICP measure 2017: 2.61%; Consensus:2.6% 2018: 2.2% vs. Consensus 2.7%). The comparably low forecast for 2018 is a result of receding global inflation pressure and the weaker growth outlook compared with our peers.
Over the weekend, I started a poll on my Twitter account on the likelihood of another snap election. Although by no means representative, 80% of the respondents said another election will take place by the end of 2018.I think this is generally the mood both in the UK as well as on the Continent.
These uncertainties provide the BOE with the perfect excuse to see through any upside miss of their inflation target. We believe that the BOE together with the Bank of Japan will be the last major central bank to endeavour any normalisation of monetary policy.
Hard or soft Brexit? In my view, the chances of a softer Brexit (i.e. a deal similar to Switzerland’s bilateral agreements) has grown bigger as a result of the election. DUP and Scottish Tory parliament members have incentives to prioritise trade and the economy over migration. Moreover, pro EU conservative MPs will probably test their influence going forward.
For further information, please contact:
Marc Brütsch - Chief Economist, Executive Director (Swiss Life Asset Managers)
D: +41 43 284 42 81