Brexit is a political crisis, not an economic one. While the extra uncertainty caused by Brexit has clearly hampered investment and consumption, the economy is fundamentally sound. There are still many different ways Brexit could play out and this document illustrates how the main ones will influence the economy. In our view, the most likely is that some kind of Brexit deal is agreed within the next six months and a lifting of the uncertainty allows economic growth to rebound later this year and into 2020. Such a burst of domestic activity would more than offset the drag from the slowing global economy and result in GDP growth accelerating from about 1.5% this year to around 2.2% next year. Our view that interest rates will be raised from 0.75% now to 1.75% by the end of next year envisages more hikes than the financial markets have assumed and implies that the pound may rise to about $1.40/£.
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