Although UK GDP growth was comparatively strong in the third quarter, declining PMI survey indicators suggest that sentiment is worsening as the Brexit date of 29 March 2019 approaches.
According to Moody’s, the recent EU-UK agreement that the UK Cabinet approved and the European Council endorsed is a positive step forward in the Brexit process. However, significant hurdles remain in attaining an orderly exit, including reaching a UK parliamentary majority approval. Given this substantial hurdle, the risk of a no-deal outcome remains, the agency added.
"In a no-deal Brexit scenario, the UK economy would be permanently smaller than with a trade agreement," said Colin Ellis, Moody's Chief Credit Officer EMEA and co-author of the agency’s Brexit Monitor report.
"So far, the impact of the UK's vote to leave the European Union on GDP growth has been notable, but still more benign than pre-referendum forecasts."
While a spike in net trade drove UK growth in the third quarter, investment is weak and has been consistently falling this year. Survey measures such as the PMIs are generally on a downward trend, signaling deteriorating sentiment, but retail sales volumes remain high and consumer service activity has picked up.
The UK trade deficit diminished further on the back of the weaker pound. Businesses' hiring intentions appear to be sluggish and house price inflation continues on a downward trend.
Futures markets anticipate that UK short-term interest rates will rise by more than 25 basis points by the end of May 2019.
