UK growth projections revised up in short term, but Central and Eastern Europe could be longer term winner from Brexit

Published at 08:38 AM on 08 September 2016

- UK GDP growth projections revised up following strong Q2 data
- Brexit vote puts global trade back in the spotlight
- Opportunities for Central and Eastern Europe if UK access to the Single Market is restricted after Brexit


The Brexit vote has shifted global economic focus over the past few months, with greater scrutiny of the UK economy, fresh interest in global trade and new opportunities for countries offering access to the Single Market. PwC’s latest Global Economy Watch assesses the prospects for UK GDP growth and services exports, while also looking at how Central and Eastern Europe could gain from potential future restrictions on UK access to the EU Single Market after Brexit.

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PwC has revised up its main scenario projections for UK GDP growth following stronger than expected national data for the second quarter of 2016. UK GDP projections have been increased to 1.8% from 1.6% for 2016 and to 0.7% from 0.6% for 2017.

John Hawksworth, chief economist at PwC, said:

“Our improved outlook reflects the latest official data, which confirmed the UK economy remained in reasonable shape going into the Brexit vote. While we’ll have to wait until late October for the first official GDP estimates for the third quarter, it’s encouraging that indicators such as retail sales held up well in July and purchasing managers indices bounced back in August.”

The Brexit vote has also put global trade back in the spotlight, with much speculation over future trade terms between the UK and the EU. Given the UK’s strength in services, this looks to be a key element in future trade deals. Over the last ten years, global services exports grew at an annual average rate of around 6.5% and now stand at around $5 trillion.

In the G7, Japan enjoyed the highest growth in services exports at 10.4% per annum over the past five years, but their total value remains below that in the US and the UK due to the significantly lower starting point in Japan. Cross-border loans have been a particular area of strength for Japan in financial services, overtaking the UK as the largest provider of such loans in 2015.

Barret Kupelian, senior economist at PwC, commented:

“Loose monetary policy in Japan, combined with a likely US interest rate increase later this year and continued uncertainty regarding Brexit in the UK, mean that Japan's recent success in exporting financial services looks set to continue. However, UK services export growth could accelerate if it is able to secure trade deals with the US and fast growing economies like China and India in addition to reaching a consensus on the Trade in Services Agreement.”

If Brexit leads to the UK facing restrictions on its access to the Single Market, then there may be opportunities for the Central and Eastern European (CEE) economies to attract foreign direct investment from the UK. On average, the CEE economies have outperformed the wider EU at attracting foreign investment, in part due to their low labour costs and relatively fast labour productivity growth. The stock of foreign direct investment in CEE economies was around 120% higher in 2014 than 2004, compared to a 95% increase across the EU-28 as a whole.

Barret Kupelian, senior economist at PwC, commented:

“CEE economies have already proved themselves to be an emerging market success story, but to prolong their star performance policymakers must now improve the local business environment. Excessive bureaucracy and red tape may discourage some foreign companies from investing, despite the attractive proposition on offer.”

Ends.

For further details or a copy of this month's report, please contact Tilly Parke: [email protected] / +44 7843 372663


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