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Scope identified in 2018 three factors contributing to a deeper slowdown in the economy of the UK (AA/Negative). Declining investment related to the prolonged uncertainty over Brexit, notably visible in financial-services companies cancelling investment or shifting it abroad is one major drag. A weaker export sector against a backdrop of global trade disputes and less dynamic consumer spending are two further factors.

Output growth in the UK eased to 0.2% QoQ in Q4 2018. For the full year, it declined to 1.4% in 2018, from 1.8% in 2017 and an average of 2.0% a year over 2010-17. Scope expects growth of just 1% in 2019.

“Prolonged economic uncertainty has had a gradual, but undeniable impact in setting back growth, even if the UK avoids in the end a no-deal Brexit as we expect it will,” says Dennis Shen, analyst at Scope. “The cost of the divorce process would nonetheless continue to accumulate were negotiations to continue past 29 March.”

Shrinking investment:

• Business investment growth was only -0.9% YoY in 2018, the weakest annual figure since 2009.
• The CBI’s sentiment indicator was just off post-referendum lows in January 2019.
• About 5,000 financial-services jobs could be moved by March 2019, according to the Bank of England. Extended uncertainty may easily facilitate additional relocations after March.
• Significant net FDI inflows that averaged GBP 113bn a year between 2014-16 – more than covering the UK’s current account deficit – have dried up. They amounted to just GBP 19.5bn over the seven quarters between Q1 2017 and Q3 2018, making the UK more dependent on portfolio and debt inflows.

Less dynamic exports:

• A post-referendum 15% depreciation in sterling in nominal effective terms helped strong export performance after the 2016 Brexit vote. The slowdown in European and global growth since 2018 has, however, spread to the UK export sector, exacerbating weakness in the domestic economy. Net exports cut 0.2pp from annual growth in 2018, compared with a contribution of 0.5pp in 2017. The effects of earlier sterling depreciation on manufacturing export growth are moreover fading.

Tightening consumer constraints:

• Household consumption growth eased modestly to 1.9% YoY in 2018 from 2.2% YoY in 2017 and 3.2% in 2016.
• Consumer confidence in January fell to its lowest level since 2013.
• Unsecured consumer lending – which has buoyed consumption – has eased under regulatory scrutiny, with loan extension up only 6.6% YoY in December.
• Brexit uncertainty has contributed to a soft housing market – weakening the sense of wealth gains on the part of households.

Brexit’s cost to the economy is already higher than 1% of GDP since the June 2016 referendum even before the UK’s scheduled EU departure, according to Scope research. The costs of uncertainty, including the impact on the country’s long-run growth potential, underpin Scope’s Negative Outlook on the UK’s sovereign ratings.

“Economic weakness will endure in 2019 – probably including below-potential growth,” says Shen.

Contributing Writer: Matthew Curtin: m.curtin@scopegroup.com