Softer Brexit does not rule out economic slowdown

• the monetary policy response was proactive and fiscal policy was supportive;
• business and consumer confidence remained resilient;
• the stock markets were boosted by a weaker pound and the services sector continued growing.

However, the prolonged high Brexit uncertainty, notably since July 2018, has significantly reduced the pockets of resilience in the UK economy. The sterling depreciation (more than 12% since 2016) has increased import costs and triggered a fall in companies’ margins, which have reached their lowest level since mid-2014. Investment stands almost 2% below the pre-referendum level and contracted by -0.9% in 2018 for the first time since the Great Recession. Consumer spending growth (+1.7% in 2018) reached its lowest level in five years. In late 2018, consumer confidence reached similar low levels as in the aftermath of the Brexit referendum, while the savings rate fell to a record low. The weakness of domestic and also external demand has driven a strong deceleration in turnover growth in the manufacturing sector (below 2% y/y) while services remained more resilient (around 8% y/y).

Hence, excluding the contingency stockpiling, the UK economy has been in technical recession since Q3 2018 and should remain so in H1 2019 until the risk of a no-deal Brexit is fully off the table. We continue to give 25% probability for a no-deal Brexit in 2019. The uncertainty is estimated to cost UK GDP growth -0.3pp every year and should continue to weigh in 2020 as negotiations on the future Free Trade Agreement are likely to be tough. We expect GDP growth to slow to +1.0% in 2020 after a meagre +1.2% in 2019.

Business insolvencies have been on the rise since mid-2018 and increased by +10% over the whole year (to 21,237 cases). While rapidly increasing, business insolvencies remain 40% below the 2009 highs. Top insolvencies (companies with more than EUR50mn turnover) accelerated in Q4 2018 with five cases from two in Q3. In total, there were 19 cases in 2018 vs. 15 in 2017. The most impacted sectors are retail, agri-food and construction.

We expect corporate insolvencies to increase by a further +9% in 2019 even in the event of an agreement on the separation terms and a framework for the future UK/EU relationship. This level would worsen to +20% in the event of a no deal Brexit, which would also see the UK economy move into recession (GDP would fall by -1%).

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