MORGAN STANLEY: Get used to a 'new normal' of weaker UK growth thanks to Brexit
- 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:
Business investment has also taken a hit. The bank calls it "subdued ... despite returns holding at robust levels."
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