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Money There's a coming storm set to 'batter' the UK economy — and it has nothing to do with Brexit

23:26  11 november  2017
23:26  11 november  2017 Source:   businessinsider.com

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But, according to analysts at Pantheon Macroeconomics, there ’ s a fresh headwind coming to slow down the UK economy , and for once it has absolutely nothing to do with Brexit .

But, according to analysts at Pantheon Macroeconomics, there ' s a fresh headwind coming to slow down the UK economy , and for once it has absolutely nothing to do with Brexit .

  There's a coming storm set to 'batter' the UK economy — and it has nothing to do with Brexit © GettyRising oil prices will drag on the British economy, creating a further headwind for the already weak UK.

  • The recent $10 per barrel increase in Brent crude "will subtract 0.2% from nominal GDP, provided that net consumption remains at the 2016 level."
  • UK economy already suffering thanks to Brexit's impact on the pound and the wider investment landscape.


LONDON — Brexit has been the main focal point of discourse around the UK economy over the last year or so.

Quotes in the article

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Why has the Bank of England raised rates?

  Why has the Bank of England raised rates? So it begins. Britain has finally embarked on the long road towards normal interest rates. Or has it? While today's Bank of England decision to raise interest rates to 0.5% is certainly significant - the first such moment in a decade - it is worth remembering that we are still a long way from "normal".Normally the Monetary Policy Committee (MPC) raises interest rates because the economy is growing strongly. It lifts them because inflation is on the rise and because higher borrowing costs are the main thing to bring that growth under control.But the Bank's explanation today was a little less exuberant.

But, according to analysts at Pantheon Macroeconomics, there ’ s a fresh headwind coming to slow down the UK economy , and for once it has absolutely nothing to do with Brexit .

Storm clouds above Canary Wharf in London. A source close to the Brexit secretary, David Davis, said he and the chancellor, Philip Hammond, had last week sought to offer reassurance that they Delegations from Frankfurt, Paris, Dublin and Madrid are all coming to the UK to pitch to bankers.

44.50
-0.11
-0.25%

Brexit has very clearly had a negative impact on growth and the UK's position in global growth standings.

The pound has slumped, inflation has shot upwards (hitting its highest level in over five years last month), real wage growth has stagnated, and GDP growth has slowed significantly.

All of these negatives, if not solely caused by the vote to leave the EU, have certainly been exacerbated by Britain's impending exit from the bloc.

But, according to analysts at Pantheon Macroeconomics, there's a fresh headwind coming to slow down the UK economy, and for once it has absolutely nothing to do with Brexit.

FILE PHOTO: Used oil barrels are stacked at a storage facility in Seattle, Washington February 12, 2015. REUTERS/Jason Redmond© Provided by Business Insider FILE PHOTO: Used oil barrels are stacked at a storage facility in Seattle, Washington February 12, 2015. REUTERS/Jason Redmond "The recent surge in the oil price has added to the headwinds set to batter the economy over the next year," Samuel Tombs, Pantheon's chief UK economist wrote in a note dated November 8.

Mark Carney knows a recession is coming — that's why he is under pressure to raise interest rates

  Mark Carney knows a recession is coming — that's why he is under pressure to raise interest rates Everyone thinks the Bank of England will raise interest rates to 0.5%. But the economy isn't actually that strong and, under different circumstances, the central bank might prefer to leave the rate where it is. 

Threadneedle Street is thought to have backed itself into a corner – with financial markets reckoning there is an 80% chance of a hike – after the MPC said at its last meeting in September it could move to increase rates within the “ coming more on this story. How has Brexit vote affected UK economy ?

It decided there had been lasting damage caused by the financial crisis and that the UK would never return to pre-crisis levels of productivity And it was a mistake to batter a still-fragile economy with tax increases and spending cuts in 2010. How has the Brexit vote affected the economy ?

Oil prices have rebounded to their highest levels in over two years in the past month, hitting $64 per barrel this week, largely driven in the short term by political strife in Saudi Arabia, which has filtered through create concerns about possible disruption in the world's second largest oil market.

Watch: What the Saudi corruption crackdown means for oil (Bloomberg)

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There is nothing in the data to suggest a rate rise was appropriate even before the monetary policy committee’ s May meeting, and since then the data has worsened further. How has the Brexit vote affected the UK economy ? June verdict.

switch to the UK edition. Corbyn has seen the light on Brexit . The budget certainly solved nothing in the macro- economy or in the centre-right’ s deeply divided view of it . Hammond’ s budget was about keeping a battered show on the road. It was managerial.

This, Tombs argues, is bad news for Britain's already fragile economy. Effectively, Britain is a net consumer of oil — meaning it uses more foreign oil that it can produce itself.

"Britain has been a net consumer of oil since 2006, because production from ageing, depleted oil fields in the North Sea has plunged," Tombs writes.

"A mini-revival in production since 2014, facilitated by investment during the period of triple-digit oil prices, has done little to close the shortfall with consumption. The U.K.'s net consumption of oil amounted to 584 million barrels in 2016, as our first chart shows."

Here is that chart:

Screen Shot 2017 11 09 at 10.33.34© Provided by Business Insider Screen Shot 2017 11 09 at 10.33.34

Tombs estimates that the increase of $10 per barrel in Brent crude oil in recent weeks "will subtract 0.2% from nominal GDP, provided that net consumption remains at the 2016 level."

That's because oil prices are acutely felt by consumers — the great drivers of the UK economy.

"The pain of higher oil prices will be felt swiftly by consumers; motor fuel prices respond to changes in crude prices with a lag of just three weeks," Tombs argues.

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How is the UK economy weathering its pending split with Europe? While the British pound has The Fall of the United Kingdom - Coming Catastrophes in the UK Economy - Duration: 1:04:13. Autumn Statement: £2trn Brexit black hole set to drag UK economy for decades - Duration: 1:06:07.

Not only will consumers be hit, but the Brexit driven revival in the UK's manufacturing sector will also take a bashing from the increase in oil prices. Manufacturing has been boosted by the drop in the pound since the vote, as foreign importers buy more goods from the UK at knock down prices.

Oil's rise, however, could end that renaissance.

"Our second chart shows that the jump in oil prices is consistent with year-over-year growth in manufacturing output declining to about zero next year, from 2.8% in September," Tombs says.

Here is that chart:

Screen Shot 2017 11 09 at 10.33.39© Provided by Business Insider Screen Shot 2017 11 09 at 10.33.39

Not only will Britain have to contend with the economic uncertainty Brexit has caused going forward, but so too will it have to cope with the negative impact of more expensive oil.

Tombs is not all doom and gloom, however, noting that in theory "higher oil prices—if sustained—should encourage firms to switch to less oil-intensive means of production and they should incentivise households to consume services instead of goods."


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