Modest growth if “friction-light” Brexit deal achieved, predicts KPMG

Chris Hearld

Investment in infrastructure and technology is key to bridging the Northern productivity gap and more support is needed to bolster the UK’s economic competitiveness post-Brexit, according to Chris Hearld, Northern chairman at KPMG.

The call comes as KPMG UK publishes its quarterly Economic Outlook Report, which reveals that the UK economy is set for modest growth if a positive Brexit deal can be reached with the EU.

KPMG predicts that UK GDP will grow by 1.3% in 2018 and 1.4% in 2019.

This will mark the lowest rate of growth since 2008 and 2009.

These figures are based on an assumption that the UK Government will achieve a relatively friction-free Brexit and transition deal.

If a disorderly Brexit were to occur, KPMG predicts a rapid slowing of growth to 0.6% in 2019 and 0.4% in 2020.

The report also finds that Brexit uncertainty is not the only factor inhibiting growth.

Poor productivity continues to be a drag, with businesses finding it difficult to recruit because of dwindling spare capacity.

The manufacturing sector is still seeing low export levels, despite the weakness of the pound, and retailers in particular continue to face a challenging environment.

In addition, despite high employment levels, the report predicts workers can expect pay growth of around 3%.

KPMG’s own research conducted last year ranked the UK’s 12 regions by productivity and placed the North West sixth, the North East eighth and Yorkshire and the Humber 10th in the country.

Chris Hearld said: “The challenges raised by our UK Economic Outlook Report are particularly relevant in the North where productivity remains one of the core issues preventing the region from reaching its growth potential.

“We believe that investment in new technology, alongside building a skills base to embrace digitisation, will be fundamental to solving that puzzle and will help make sure that the economy is competitive post-Brexit and long into the future.

“The North’s own regional strategy will need to mirror the major themes of the UK industrial strategy around innovation, people, infrastructure, business environment and communities.

“For the region to push on for life outside the European Union we need to see a concerted effort across all levels of the economy to deliver against those ambitions.”

He added: “As a priority, there must be stronger national Government support for infrastructure investment that can bring more people together, faster, while local government has to capitalise on its devolved powers to create an environment that will foster business growth.

“As for businesses, they have their own responsibility to embrace new technologies to drive regional productivity and maintain the nation’s competitive edge in international markets.”

The report forecasts that the UK housing market will see moderate growth as prices start to rebalance across regions.

KPMG UK predicts that house price growth will slow from 4.5% in 2017 to 2.6% in 2018, 2% in 2019, and 1.6% in 2020.

High price levels, uncertainty around the future economic outlook, and rising interest rates are expected to take their toll in London and the South East, especially.

House prices in the capital are expected to drop by 0.7% in 2019.

Across the UK, the housing market’s strongest growth is expected in regions with lower pressures on valuations, such as Scotland, where KPMG expects to see growth of 4.9% in 2018.

In comparison, the housing market in London will continue to struggle, with gradual falls in house prices until 2021.

Yorkshire and The Humber region is expected to achieve the fastest growth rate in house prices across the North of England in 2018 at 3.2%, albeit down from 4.2% in 2017 and predicted to stall further to 2.7% in 2019 and 2.3% in 2020.

House price growth in the North West is expected to fall from 5.8% last year to 2.3% in 2018, but stabilise over the next two years (2019 – 2.6%, 2020 – 2.3%).

While house price growth is predicted to fall from 2.6% in 2017 to 1.1% in 2018, they could rebound to 3.2% in 2019 and 3.3% in 2020.

Explaining the report, Yael Selfin, chief economist at KPMG UK, said: “Brexit will have a lasting effect on the UK, but economically it isn’t the only game in town.

“Issues such as improving productivity, reducing regional economic disparity, and ensuring that UK workers have the skills to meet employers’ needs should also be at the forefront of the Chancellor’s mind.

“Bringing productivity growth back to pre-2008 levels alone could see the British economy grow by more than 2%.

“If negotiations between the EU and UK result in a relatively friction-free agreement, then growth is likely to remain around 1.4% in the medium term as a result of relatively weak productivity.

“If we see a disorderly Brexit, growth will obviously slow more dramatically.

“If negotiations end well, the MPC (Bank of England Monetary Policy Committee) are likely to raise interest rates to 1% at the tail end of 2019.

“If no deal is reached, the MPC will need to use interest rates to soften the economic impact.”

KPMG UK says uncertainty and risks around Brexit are likely to make the MPC cautious during the critical months ahead.

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