UK should avoid severe recession or house price crash despite growth downgrades following Brexit vote

Published at 00:01 AM on 19 July 2016

  • Real GDP growth projected to slow to around 1.6% in 2016 and 0.6% in 2017, but should gradually recover thereafter as the initial shock from the Brexit vote fades
  • Alternative scenarios suggest growth in 2017 between around +1.5% and -1%, but no severe recession of the kind seen in the early 1980s or 2008-9
  • UK house price growth is expected to decelerate to around 3% in 2016 and around 1% in 2017, but no major house price crash

UK growth had already eased from around 3% in 2014 to around 2% before the EU referendum due primarily to slower global growth, but the vote to leave the EU is likely to lead to a significant further slowdown. UK GDP growth is forecast to decelerate to around 1.6% in 2016 and 0.6% in 2017 according to PwC’s main scenario in its latest UK Economic Outlook report.

Quarter-on-quarter GDP growth could fall to close to zero in late 2016 and early 2017 in this main scenario, but is then projected to recover gradually later in 2017 as the immediate post-referendum shock starts to fade. The UK would avoid recession in this scenario, although the report notes that uncertainties around this central view are significant, with alternative scenarios showing GDP growth in 2017 of anywhere between +1.5% and -1%. But even this latter relatively pessimistic scenario would not be a severe recession of the kind seen in the early 1980s or in 2008-9.

The main reason for the slowdown is projected to be a decline in business investment, particularly from overseas in areas such as commercial property. Construction companies and capital goods manufacturers could also be relatively exposed to this kind of short-term cyclical slowdown.

Consumer spending growth is projected to hold up better, but could still slow from previous strong rates, dropping to around 1.3% in 2017 in PwC’s main scenario. This reflects the impact of a weaker pound in pushing up import prices and squeezing the real spending power of households, as well as lower consumer confidence levels and slower jobs growth. The weaker pound should also boost net exports, however, which should move from being a drag on overall UK GDP growth in 2015 to a positive contributor in 2017.

John Hawksworth, chief economist at PwC, commented:

“UK economic growth held up reasonably well in the run-up to the referendum and, while the vote to leave the EU was a major shock, we would expect the relatively flexible UK economy to adapt to this in the long term. But growth is likely to be significantly slower in the short term due to the political and economic uncertainty following the Brexit vote, which is likely to cause some business investment to be scaled down or deferred.

“The Bank of England has already taken action to steady the ship, however, and we do not expect the post-Brexit economic downturn to be anything like as severe as that following the global financial crisis of 2008-9 or indeed the deep recession of the early 1980s. Our main scenario projections suggests that the UK should narrowly avoid a recession over the next year, although we recognise that risks are weighted somewhat to the downside at present.

“Businesses need to hold their nerve through this unsettled period, take stock of the potential impact of Brexit on their markets and operations, and make contingency plans for alternative outcomes. They should also consider the longer term upside possibilities stemming from Brexit, particularly in terms of building closer trade relationships with relatively fast growing economies like China and India to offset any decline in trade with the EU27.”

Key projections for the UK economy

 

2016

2017

Real GDP growth

1.6%

0.6%

Consumer spending growth

2.5%

1.3%

Inflation (CPI)

House price growth

0.7%

3.1%

1.8%

0.9%

Source: PwC main scenario projections

UK housing market to slow after Brexit but tough challenges remain for generation rent

PwC anticipates a marked slowdown in house price growth, but no major crash. In PwC’s main scenario, UK house price growth is expected to decelerate to around 3% in 2016 and around 1% in 2017. After this initial dip, however, projected house price growth picks up again to around 4% in 2018 and an average of around 5%-6% per annum in the longer term as persistent supply shortages keep house prices rising faster on average than earnings.

PwC estimates that average UK house prices in 2018 could be 8% lower than if the UK had voted to stay in the EU (although this would still leave them 8% higher on average than in 2015). The estimated impact of Brexit varies by region: average house prices in London could be around £60,000 lower due to Brexit than they would otherwise have been by 2018, in contrast to a reduction of £10,000 in Scotland and just £8,000 in the North East.

UKEOchart180716

 

Richard Snook, senior economist at PwC, commented:

“We think there are four main reasons why the Brexit vote will lead to a slowdown in the housing market in the short term: the deterrence of foreign investment, uncertainty regarding the future of EU nationals living in the UK, a reduction in consumer confidence and turbulence in the banking sector. While these factors will weigh heavily on the market in the short term, we expect a gradual recovery from 2018 onwards as market fundamentals reassert themselves.”

PwC’s research into housing affordability for generation rent (the 20-39 year old age group who are finding it increasingly difficult to get on the housing ladder) shows that buyers may have to save for as much as 19 years in order to buy their first home (assuming the deposit has to be raised entirely from their own savings without family assistance). This has trebled since 2000 when the same group would have been able to buy after saving for just six years.

The analysis finds a huge disparity in outcomes between renters and those 20-39 year olds who have already managed to get a foot on the housing ladder. This second group who already managed to buy has been largely insulated from the deterioration in affordability due to capital gains made on their existing homes and continued relatively low mortgage rates. PwC estimates that someone buying their first home in 2016 could afford to step up to a larger property after only around four years, less than a quarter of the time it could take to save for an initial deposit as a renter.

Richard Snook, commented:

“Young people without family assistance may have to save for close to two decades to accumulate a deposit to buy their first home if they start saving today.  This emphasises our country’s need to both build more homes and increase the quality of rented accommodation. Many people cannot rely on help from the ‘bank of mum and dad’ to speed up the buying process.”

Ends.

Notes for editors

  1. The projections in PwC’s UK Economic Outlook report draw on the detailed analysis of the potential economic impact of leaving the EU in a March 2016 report commissioned from PwC by the CBI, updated to take account of the latest available economic data up to early July. In particular, the main scenario in the UK Economic Outlook report is broadly aligned with the ‘FTA’ scenario in the earlier report for the CBI, which is available here: http://www.pwc.co.uk/services/economics-policy/insights/implications-of-an-eu-exit-for-the-uk-economy.html
  1. PwC’s real GDP projections relate to the UK average, but further analysis also indicates substantial regional variations. A more detailed consideration of the performance and prospects of the Northern Powerhouse is available in the full UK Economic Outlook report.
  1. The analysis of affordability for first time buyers complements other research published by PwC over the past year on the challenges facing generation rent in getting on the housing ladder, notably a research article in the July 2015 edition of UK Economic Outlook that is available here: https://www.pwc.co.uk/assets/pdf/ukeo-section3-housing-market-july-2015.pdf

Ends.

For further information please contact Tilly Parke: [email protected]pwc.com / +44 20 7804 8761


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