The Brexit referendum vote has reduced growth prospects and increased volatility, as reflected by the large currency depreciation. Monetary policy has mitigated the immediate impact of the shock by stabilising financial markets and shoring up consumer confidence. This projection assumes the UK will operate with a most favoured nation status after 2019, but there is considerable uncertainty about this, which will increasingly weigh on growth, and in particular private investment, including foreign direct investment. Higher inflation is projected to hit households’ purchasing power and to reduce corporate margins, weakening private consumption and investment. As growth slows, the unemployment rate is projected to rise.
Macroeconomic policies need to be expansionary. Inflation is set to exceed the target of 2%, but the monetary policy stance is expected to be unchanged as the inflationary impact of currency depreciation should be temporary. The latest government plans released in the Autumn Statement indicate a slower pace of fiscal consolidation and some increase in public investment. A more significant increase in public investment would support demand in the near term and boost supply in the longer term. With a weak economic outlook, further raises in the minimum wage should be considered prudently.
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NOTE: All signed articles in the OECD Observer express the opinions of the authors and do not necessarily represent the official views of OECD member countries.
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