ECONOMIC REPORT OF THE PRESIDENT

United Kingdom
It has been a turbulent year for the United Kingdom since the June
referendum in which voters called for the county to leave the European
Union. It remains too early to tell what the economic impact of a ‘Brexit’
will be for the United Kingdom and the world, as expectations for future
growth evolve with the release of new data. The Bank of England originally
marked down its forecast for UK growth for 2016 through 2018 in its third
quarter inflation report after the referendum; in its fourth quarter inflation
report, the bank revised its forecast upward for 2016 and 2017 reflecting
positive GDP data in 2016:Q3, but further lowered its forecast for 2018.
The central bank acted strongly to support the UK economy at its August
policy meeting, lowering its key policy rate and signaling that it stood ready
to provide more accommodation if needed. However, the depreciation of
the pound since the referendum—it fell as much as 16 percent on a tradeweighted
basis, reaching its lowest level since 2010—has sparked inflationary
pressures. Citing these developments at its November meeting the bank’s
policy committee shifted its guidance from an easing to a neutral outlook
for monetary policy.
Global equity markets initially plunged after the Brexit vote, though
generally rebounded later and recovered their losses. The FTSE 250
Index—made up of the stocks of the largest 250 companies on the London
Stock Exchange that are not in the top 100 stocks by market capitalization—dropped
7.5 percent in the immediate aftermath of the vote, but has
since recovered these loses. Despite these developments, the real economy
has proved to be remarkably resilient in the months after the vote: real
GDP growth for 2016:Q3 surprised on the upside, growing at a 2-percent
annual rate, similar to the pace over the preceding four quarters and meeting
forecasts issued prior to the vote; the harmonized unemployment rate held
steady at 4.8 percent through the end of August 2016; consumer confidence
was above its long-term average; and purchasing manager surveys of manufacturing
and services activity continued to indicate expansion. Growth in
industrial production, however, missed expectations, and some economists
assert that the negative implications of Brexit have yet to materialize given
the estimated two-year exit process once formal negotiations with the
European Union begin. Of particular concern is the risk to the UK’s financial
sector if UK-based firms lose “passporting” rights to operate on an equal
footing in the EU single market. In many ways, Brexit’s impact is yet to be
seen as the true terms of exit are yet to be understood, and the uncertainty
involved could weigh on the economy over time.
The Year in Review and the Years Ahead | 135