KPMG predicts modest growth if ‘friction-light’ Brexit deal achieved

The UK economy is set for modest growth if a positive Brexit deal can be reached with the EU, according to KPMG UK’s quarterly Economic Outlook Report.

KPMG predicts that UK GDP will grow by 1.3 per cent in 2018 and 1.4 per cent 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 occurs, KPMG predicts a rapid slowing of growth to 0.6 per cent in 2019 and 0.4 per cent in 2020.

The report also finds that Brexit uncertainty is not the only factor inhibiting growth. Poor productivity continues to be a drag, and businesses are finding it increasingly 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 three per cent.

Catherine Burnet, Scottish regional chair for KPMG, said: “Brexit will have a lasting effect on the UK, but economically it isn’t the only game in town. Echoing the sentiment of the Scottish Government’s latest Programme for Government, our own discussions with clients continue to raise issues such as improving productivity, reducing regional economic disparity, and ensuring workers have the skills to meet employers’ needs. Bringing productivity growth back to pre-2008 levels alone could see the British economy grow by more than two per cent.

“If negotiations between the EU and UK result in a relatively friction-free agreement, then growth is likely to remain around 1.4 per cent 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 Monetary Policy Committee (MPC) are likely to raise interest rates to one per cent at the tail end of 2019. If no deal is reached, the MPC will need to use interest rates to soften the economic impact.”