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UK Industry Report: Q1 2017

UK Economic Outlook after the June 8 Snap Election

In a move that caught many by surprise, Prime Minister Theresa May called a snap election for 8 June. Parliament overwhelmingly approved her request on 19 April, which means that the country is heading for its second general election in just over two years. Dun & Bradstreet expects May’s centre-right Conservative Party to win the vote, given the reasonably favourable state of the economy and, more importantly, the disarray in the centre-left Labour Party—the main opposition party. If, as expected, May’s government increases its working majority from the currently meagre 17 seats, the passage of controversial laws around Brexit will become easier. While this will improve May’s position in domestic politics, it will not necessarily improve her position in the upcoming negotiations with the European Union. Worryingly, separatist forces in Scotland and Northern Ireland are expected to achieve a good result as well, thereby endangering the structural integrity of the country over the medium to long term (especially in Scotland).

Regardless of May’s surprising decision to call an election, our Brexit baseline scenario remains unchanged: Dun & Bradstreet expects the UK to exit the EU in March 2019. An interim arrangement will come into force until a free-trade agreement (FTA) is negotiated, with the British government certainly pushing for a completion date before the 2022 elections.

During the period that the interim arrangement is in place, the UK might have to accept the supremacy of the European Court of Justice over British courts, and the free movement of labour in exchange for ongoing market access. However, in the yet-to-be-started negotiations about the FTA, it seems very likely that the British government will sacrifice access to the EU’s market in order to regain control over its immigration policy, thereby creating significant risks to supply chains involving the UK. We recommend monitoring the situation continuously, as the frequency of events remains high.

Forward-Looking Indicators Still Robust

On the economic front the picture still looks reasonably good, with forward-looking indicators continuing to show robust readings. Eurostat’s Industrial Confidence Indicator stood at 9.1 in Q1 2017, the highest reading since Q2 2014. Despite a modest appreciation after the news of a snap election, the pound is still down significantly against pre-referendum values, especially against the US dollar. This means that British manufacturers have gained price competitiveness on global markets over the past three quarters, a trend we expect to last until the Brexit negotiations are completed. Meanwhile, consumer confidence is flat, coming in at -4.3 in March (meaning that more people are pessimistic about the economic outlook than are optimistic). While the current economic situation is not universally seen as a problem, concerns about the macroeconomic outlook created by Brexit are weighing on confidence levels. Taking all factors into account, we expect the economy to grow by 1.8% in 2017, unchanged from last year.

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