Morgan Stanley | UK is no longer an ‘Underperformer’. With more stimuli than expected in the March budgets and with the postponed tax increases until 2023, we raised the estimates investment and growth for the United Kingdom.
With a reopening plan clear after Easter and all the adults vaccinated before July 2020 UK is on the way to a rebound in GDP growth in the second and third quarter of 2021 (Q2-3T21) and a return to normal activity levels in 2Q22 so my macro does not believe that it is going to fall behind Europe in recovery.
After the Trade and Cooperation Agreement (TCA) Now what? Although not as disruptive as a WTO agreement, the ATT is still a hard Brexit that introduce numerous trade barriers (non-tariff) and market access difficulties. Due to the significant drop in European exports and imports in 2021 (among other factors), my economists estimate that the This year’s GDP will be 0.8% lower than it would have been in a non-Brexit scenario.
Inflation below target. After a weak 2020, the reflation due to the reopening and the effects that energy consumption has on the calculation base should support rising headline inflation hitting target this spring. Looking ahead, consumption and lack of supply should put inflation pressures. But the lack of activity would compensate for this rebound by leaving it slightly below the latest MPC forecast (marginal propensity to consume).
Giro hawkish gradual. Once the reopening is advanced and the strength of the economic rebound is tangible, the quantitative easing should be reduced to half the current weekly rate (will probably be decided at the August meeting) with the first rate hike in 2023.