Economic uncertainty likely to weigh on UK’s growth; BoE expected to slash rate in November

Economic uncertainty is likely to weigh on the growth outlook of the United Kingdom, with post-referendum deceleration still in prospect, although recent data have proved to be resilient. Since the Bank of England’s multi-faceted policy easing on Aug 4, incoming economic data have been scrutinized to bear out the view of an uncertainty-driven slowdown in the aftermath of the EU referendum held o June 23.  Further, the BoE is expected to lower the Bank Rate to 0.10 percent in November.

The first official post-referendum data pertaining to trends in economic activity have in fact proved to be more resilient than expected, with industrial and construction output in July exceeding eve-of-release economists’ forecasts. Retail sale volumes have surged in July, before failing to reverse meaningfully in August.

Further, business surveys have also at least partly retraced the declines seen in the immediate aftermath of the vote. Most notable have been the sharp rises in Purchasing Managers’ Indices in August. The composite PMI across services, manufacturing and construction posted the sharpest one-month gain in the history of the survey, following the sharpest one-month fall in July, leaving it above the average seen over the course of the second quarter.

Moreover, the post-referendum currency depreciation will remain a key driver of the inflation outlook. Headline and core inflation surprised to the downside in August, with annual CPI inflation holding at 0.6 percent while the 'core' rate (excluding food, energy, alcohol and tobacco also remained unchanged at a pace of 1.3 percent y/y. This came despite a rise in energy prices on a year ago, with the main downward surprise stemming from the absence of an upward push from imported clothing, footwear and furniture prices.

The Bank of England’s August policy announcement saw the MPC vote to deliver a multifaceted policy package, with a cut in Bank Rate to 0.25% as part of the suite of measures. While the policy was unchanged at the MPC’s meeting in September with the Committee returning to a unanimous vote, a further easing in policy remains in prospect.

Meanwhile, the expansion of gilt purchases above the initial GBP60 billion announced in August at this stage remains conditional on both a softening of the recent data tone and a modest scale of stimulus in November’s Autumn Statement. Conversely, a continuation of recent near-term data resilience, alongside the incremental Bank Rate cut at November’s MPC meeting would obviate the need for further loosening of policy in early 2017, Lloyds Bank reported.