Brexit Uncertainty: A Drag On UK GDP In Q4 2019, Q1 2020 To Improve

Brexit uncertainty: a drag on UK GDP in Q4 2019, Q1 2020 to improveLast quarter, UK economic growth stalled overall due to the acute uncertainties related to the ongoing Brexit procedure

Political uncertainty about the Brexit procedure caused the United Kingdom’s (UK’s) gross domestic product (GDP) to stagnate in the fourth quarter of 2019. However, the strong decrease in political uncertainty since the 12 December parliamentary election should allow the UK economy to rebound back to growth during the first quarter of this year, explains Janwillem Acket, chief economist at Julius Baer

This should keep the Bank of England on hold for the time being. We maintain our Neutral stance for GBP, given lasting incertitude about the final relationship between the UK and the European Union (EU). Last quarter, UK economic growth stalled overall due to the acute uncertainties related to the ongoing Brexit procedure. In particular, industrial production contracted by -0.8% quarter-on-quarter, services output grew by just 0.1% and only domestic construction output increased notably, namely by 0.5%. Looking at expenditures, public spending compensated for almost-flat household spending, falling business and dwellings investments and negative net exports.

However, the significant decrease in domestic political uncertainty since the 12 December parliamentary election should allow the UK’s economy to regain some positive quarterly growth momentum, i.e. approx. 0.2% during the first quarter of 2020, given pent-up demand from investors and households from the previous quarter. We therefore expect the Bank of England to remain on hold for longer, particularly given the ongoing lack of certainty in the months ahead about the final relationship between the UK and the European Union (EU). Given these incertitudes, market volatility is prone to surge at short notice, which is why we maintain our Neutral GBP stance for the time being.