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

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  • Morgan Stanley says weaker growth looks set in for the long haul once the UK formally leaves the EU.
  • The average quarterly growth rate since the third quarter of 2016 was about 0.4%, which looks set to continue until at least the fourth quarter of 2020, economists at the bank said. 
  • In the three years before the referendum, that rate was about 0.6%.

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.

Read more: Here’s what happens next in Brexit

„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

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

Subdued business investment

SEE ALSO: The UK government says Brexit will harm the economy. A lot of damage has already been done.

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Source: Business insider

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