www.pwc.co.uk/economics
UK Economic
Outlook
July 2016
Special features on:
• UK economic prospects after Brexit
• UK housing market outlook
• The Northern Powerhouse: past performance and future potential
Visit our blog for periodic updates at:
pwc.blogs.com/economics_in_business
2
UK Economic Outlook July 2016
Contents
Section
1. Summary
4
2. UK economic prospects after Brexit
7
• 2.1 Recent developments and the immediate impact of Brexit
8
• 2.2 Economic growth prospects after Brexit: national, sectoral and regional
10
• 2.3 Outlook for inflation and real earnings growth
14
• 2.4 Monetary and fiscal policy options
16
• 2.5 Summary and conclusions
16
3. UK housing market outlook
17
• Introduction and key findings
17
• 3.1 Recent housing market developments
18
• 3.2 House price prospects – the impact of Brexit
19
• 3.3 Renting for a generation? Housing affordability trends for first time buyers
24
• 3.4 Conclusion
27
• Technical annex: modelling methodologies
28
4. The Northern Powerhouse: past performance and future potential
30
• Key points and introduction
30
• 4.1 Comparative regional performance
31
• 4.2 Explaining the comparative performance of the Northern Powerhouse
33
• 4.3 Future employment growth potential of the Northern Powerhouse
35
• 4.4 Policy considerations
37
• 4.5 Conclusions
39
Appendices
A Outlook for the global economy
40
B UK economic trends: 1979-2015
41
Contacts and services
42
3
UK Economic Outlook July 2016
Highlights and key messages
for business and public policy
Key projections
2016
2017
Real GDP growth
1.6%
0.6%
Consumer spending growth
2.5%
1.3%
Inflation (CPI)
0.7%
1.8%
House price growth
3.1%
0.9%
Source: PwC main scenario projections
• UK economic growth had already
slowed from around 3% in 2014 to
around 2% before the EU referendum
due to slower global growth, but the
vote to leave the EU is likely to lead
to a significant further slowdown.
• In our main scenario, we now project
UK growth to slow to around 1.6% in
2016 and 0.6% in 2017, largely due to
the increased political and economic
uncertainty following the ‘Brexit’ vote.
The UK would, however, narrowly
avoid a recession in this main scenario.
• There are particularly large
uncertainties around any such
projections after the Brexit vote.
We have therefore also considered
alternative scenarios in which UK
growth in 2017 could vary from
around -1% if downside risks
materialise to around 1.5% if
there is an early recovery.
• We expect the Bank of England to
loosen monetary policy over the
summer to support the economy
through this period of uncertainty,
while public borrowing is allowed to
rise to take the strain of slower growth.
• The main reason for the slowdown
will be a decline in business
investment, particularly from
overseas in areas like commercial
property. This is being driven by
political instability in the short term,
as well as uncertainty about the UK’s
future trading relationships with
the EU in the longer term.
• Consumer spending growth is
projected to hold up better, but will
still slow from previous strong rates,
dropping to around 1.3% in 2017 in
our main scenario. This reflects the
impact of a weaker pound in pushing
up import prices and squeezing the
real spending power of households,
as well as lower consumer confidence
levels and slower jobs growth.
• The weaker pound should also boost
net exports, however, which should
move from being a drag on GDP
growth in 2015 to a positive
contributor in 2017. This should also
see the UK current account deficit
begin to shrink from recent high levels.
• Service sector growth will slow but
should remain positive in 2016-17,
but construction will suffer from
lower investment levels. Capital
goods manufacturers will suffer
for the same reason, but some
manufacturing exporters will
benefit from the weaker pound.
Housing market will be hit by Brexit,
but first time buyers still face tough
challenges
• House price growth is likely to slow
due to uncertainty relating to Brexit.
We do not expect a major house price
crash, but average UK prices by 2018
could be around 8% lower than if the
UK had voted to stay in the EU in our
main scenario.
• However, we still expect average
UK house prices to rise in our main
scenario even with the effects of
Brexit. We estimate that prices
could be around 8% higher on
average in 2018 than they were in
2015, although there is a broader
than usual range of uncertainty
around this central estimate.
• London may be particularly hard hit
due to the weakening of international
investor demand, with the impact of
Brexit being to reduce average London
house prices in 2018 by around
£60,000 relative to a scenario where
the UK voted to remain in the EU.
• Despite this moderation of house price
growth, first time buyers still face a
tough challenge to get on the property
ladder, with a potential average
savings period for a deposit of around
19 years for young people without
family assistance. This remains a
major barrier for generation rent to get
on the housing ladder, emphasising
the need both to build more homes
and to increase the quality of rented
accommodation in the UK.
All regions hit by Brexit, with increased
focus needed on boosting growth
outside London
• We project that London will remain
the fastest growing region, but its pace
of expansion could slow markedly to
just over 1% in 2017 following the
Brexit vote. Other regions are likely to
see growth slow to below 1% next year.
• If future jobs growth in the North
could be raised to the levels seen
in the South East, we estimate that
almost 200,000 extra jobs could
be created by 2025 in the North
of England. But this will require
a sustained period of higher
investment in infrastructure,
housing and skills in these regions.
4
UK Economic Outlook July 2016
1 – Summary
Recent developments
The UK economy grew by just over 3%
in 2014, the fastest rate seen since 2006,
but then slowed to around 2% in the
year to Q1 2016 as global growth
moderated. The available data for the
second quarter suggest that UK growth
held up reasonably well in the run up
to the EU referendum, particularly as
regards consumer spending, but business
investment weakened.
The vote to leave the EU on 23rd June
has added considerable political and
economic uncertainty to the UK outlook,
with the pound down sharply and the
domestically-focused FTSE 250 index
also declining (although the globally-
focused FTSE 100 has been much
stronger). Many commercial property
funds have had to suspend trading in
response to capital outflows. Gilt yields
fell to record lows on expectations that
monetary policy would be loosened in
response to the Brexit vote.
UK growth continues to be driven
primarily by services, with
manufacturing growth having stalled
over the past year and construction
weakening markedly in June.
The rate of consumer price inflation
(CPI) has remained low at around 0.3%
as commodity prices have generally
remained relatively weak, partly due
to relatively subdued global demand
growth. The latter has also been a factor
in causing the Federal Reserve to hold off
from interest rate rises in recent months.
Table 1.1: Summary of UK economic prospects
Indicator
(% change on
previous year)
OBR forecasts
(March 2016)
Independent
forecasts
(July 2016)
PwC Main
scenario
(July 2016)
2016
2017
2016
2017
2016
2017
GDP
2.0
2.2
1.4
0.4
1.6
0.6
Consumer spending
2.4
2.2
n/a
n/a
2.5
1.3
Investment
2.9
4.5
n/a
n/a
-1.4
-4.6
Source: Office for Budget Responsibility (March 2016), Consensus Economics survey (average values in early July 2016 survey)
and latest PwC main scenario
Future prospects
As shown in Table 1.1, our main scenario
is for UK GDP growth to decline to
around 1.6% in 2016 and around 0.6%
in 2017 as the effects of the vote to leave
the EU feed through1. This is well down
on pre-referendum forecasts, such as
that by the OBR in March, but similar to
the latest average of independent
forecasts of around 1.4% in 2016 and
0.4% in 2017.
The largest short-term effect of the vote
to leave the EU is likely to be on
investment growth, which we now
expect to be pushed into negative
territory in 2016 and 2017. This reflects
major projects being deferred or even
cancelled due to uncertainties
surrounding Brexit, particularly by
foreign investors in commercial
property and in sectors needing
guaranteed access to the EU single
market. These uncertainty effects
should fade eventually, but it will take
time before clarity emerges on future
UK-EU trading arrangements.
Consumer spending growth is projected
to remain stronger than overall GDP
growth at around 2.5% in 2016 and
1.3% in 2017, but is nonetheless likely to
slow significantly as real income growth
is squeezed (in part due to the weaker
pound pushing up import prices) and
the job market weakens.
There should be some potential offset
from a positive contribution to GDP
growth from net trade next year, helped
by the fall in sterling. This should also
help to reduce the UK current account
deficit somewhat next year. But this will
fall some way short of fully offsetting
the hit to domestic demand growth.
1 These projections are calibrated to be broadly consistent with the ‘Free Trade Agreement’ (FTA) scenario in our March 2016 report for the CBI on the economic
implications of leaving the EU, which is available here:
http://www.pwc.co.uk/services/economics-policy/insights/implications-of-an-eu-exit-for-the-uk-economy.html
5
UK Economic Outlook July 2016
There are always uncertainties
surrounding our growth projections and
these are particularly marked following
the vote to leave the EU, as illustrated by
the alternative scenarios in Figure 1.1
(all of which see some short-term growth
shortfall relative to our projections before
the Brexit vote). There are still considerable
downside risks relating to international
developments and the fallout from Brexit,
but there are also upside possibilities
if these problems can be contained.
In our main scenario, we expect the UK to
narrowly avoid a recession, but businesses
need to monitor and make contingency
plans for this as a downside risk.
Inflation could rebound to close to its
2% target by the end of 2017 assuming
the pound remains relatively weak and
there is no repeat of past falls in global
energy and food prices. There could be
upside risks to this inflation outlook in
the longer term if higher import prices
feed through into domestic wages and
prices more strongly than we expect,
but also downside risks if domestic
growth slows faster than we expect.
We expect an early loosening of monetary
policy through some combination of lower
official rates, assets purchase and credit
easing. As indicated by record low gilt
yields, it seems that a UK rate rise has
been pushed well into the future by
the Brexit vote.
Housing market will be hit by Brexit,
but first time buyers still face tough
challenges
In Section 3 of the report, we review
recent trends in the housing market
and present projections for house price
growth in the UK and its regions.
We also present new research that
outlines the dramatic changes in the
affordability of housing for 20-39 year olds
(who we refer to as “generation rent”).
Figure 1.1 – Alternative UK GDP growth scenarios
-8
-6
-4
-2
0
2
4
6
2017
Q1
2016
Q1
2015
Q1
2014
Q1
2013
Q1
2012
Q1
2011
Q1
2010
Q1
2009
Q1
2008
Q1
2007
Q1
Projections
%
c
ha
ng
e
on
a
y
ea
r e
ar
lie
r
Main scenario
Recession
Early recovery
Pre-Brexit scenario
Source: PwC based on latest ONS data
Our key findings are:
• The decision by the UK public to leave
the EU has shaken the property
market. We anticipate a marked
slowdown as a result, with house price
growth decelerating to 3% in 2016
and 1% in 2017 in our main scenario.
But we are not projecting a major
house price crash, and the downturn
in house price growth due to the Brexit
vote is expected to be only temporary
with a gradual upturn resuming from
2018 onwards (see Figure 1.2).
• After this initial dip in UK house
price growth, our main scenario
projects a gradual recovery, with
price growth picking up again to
around 4% in 2018 and 6% in 2019.
Thereafter, we expect growth to
average around 5-6% per annum
from 2020 to 2025 as persistent
supply shortages keep house prices
rising faster than earnings on average.
• The impact of Brexit will vary by
region, but we expect it to be most
acute in the London market. By 2018,
we estimate house prices in London
could be around £60,000 lower than
if the UK had voted to remain; this
contrasts to a difference of around
£10,000 in Scotland and just £8,000
in the North East. Of course, there
are many uncertainties around these
central estimates so these projections
can only be taken to be illustrative at
this early stage.
• But we would stress that these
are estimated differences from an
expected steady upward path for
regional house prices without Brexit.
In our main scenario, the absolute
level of house prices should still be
higher in all regions in 2018 than in
2015 despite the dampening effect
of the Brexit vote.
6
UK Economic Outlook July 2016
• Our new research into housing
affordability for generation rent shows
that buyers may now have to save for
19 years in order to buy their first
home (assuming the deposit has to be
raised entirely from their own savings
without family assistance). In 2000,
the same group would have been able
to buy after saving for just 6 years;
in 1990, it took only around 2 years.
• The affordability analysis shows a
huge disparity in outcomes between
renters and those 20-39 year olds
who have already managed to get
a foot on the housing ladder.
This group has been largely insulated
from the deterioration in affordability
due to capital gains made on their
existing homes.
• The good news for generation renters
is that Brexit may actually help them
get on the property ladder slightly
sooner as we expect it to slow the
pace of house price growth. However,
the effect is small, as we estimate a
generation renter starting to save in
2016 without family assistance might
now be able to buy in 2035, rather
than 2037 if the UK had voted to
remain. This also assumes that they
do not lose their job as a result of a
Brexit-related slowdown (though it
does allow for some reduction in
their real income growth).
The Northern Powerhouse – even
more of a priority after Brexit
As we discuss in detail in Section 4 of
this report, average income levels in the
Northern regions of England have lagged
behind the UK average for decades,
in part reflecting relatively low average
levels of skills and R&D spending in these
areas. But employment growth has been
stronger in the North West in the past
two years and inward investment levels
have been relatively high in Northern
regions in some recent periods.
Uncertainties relating to Brexit could
dampen growth in all UK regions over the
next few years, but the EU vote has also
focused renewed attention on the need for
increased investment in the Northern
Powerhouse to boost infrastructure, skills
and innovation. Such investment would
be of particular value in promoting the
world class business clusters which
already exist in sectors such as advanced
manufacturing and services or in the
promotion of new clusters.
There also need to be measures to reduce
inequalities within the North, with some
rural areas and smaller towns doing less
well than major cities like Manchester.
Connectivity is of vital importance; within
the Northern Powerhouse, between
the North and London and between
the North and the rest of the world.
Given this additional investment, we
think the North of England could resume
positive employment growth after the
initial Brexit shock fades. Our analysis
suggests the potential for almost 200,000
extra jobs in the Northern Powerhouse
regions by 2025 relative to 2015 levels.
Figure 1.2 – UK house price inflation: main scenario projections with and without Brexit
-15
-10
-5
0
5
10
15
20
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
Pre Brexit Scenario
Main Scenario
%
c
ha
ng
e
ye
ar
-o
n-
ye
ar
Source: ONS historic data, PwC analysis
7
UK Economic Outlook July 2016
2 – UK Economic prospects
after Brexit
Key points
• UK economic growth had slowed
somewhat to around 2% before the
EU Referendum, but the vote to leave
the EU could lead to a significant
further slowdown.
• In our main scenario, we now project
UK growth to slow to around 1.6%
in 2016 and 0.6% in 2017 due to
the increased political and economic
uncertainty following the ‘Brexit’
vote. The UK would narrowly avoid
recession in this scenario, although
risks are weighted to the downside.
Businesses need to make contingency
plans for these alternative outcomes.
• The main reason for the slowdown
is an expected decline in business
investment, particularly from overseas
in areas like commercial property,
due to uncertainty about the UK’s
future trading relationships with the
EU and other key trading partners.
• Consumer spending growth is
projected to hold up better, but will
still slow from previous strong rates,
dropping to around 1.3% in 2017 in
our main scenario. This reflects the
impact of a weaker pound in pushing
up import prices and squeezing the
real spending power of households,
as well as slower jobs growth.
• The weaker pound should also boost
net exports, however, which should
move from being a negative drag on
growth in 2015 to a positive contributor
in 2017. This should also see the
UK current account deficit begin
to shrink from recent high levels.
• Service sector growth will slow but
should remain positive in 2016-17,
but construction will suffer from
lower investment levels. Capital
goods manufacturers will suffer
for the same reason, but some
manufacturing exporters will
benefit from the weaker pound.
• We project that London will remain
the fastest growing region but its
pace of expansion could slow from
around 3% in 2015 to just over
1% in 2017. Other regions will see
even more modest growth in 2017,
though we do not predict negative
growth in any region in 2017 in
our main scenario.
• The UK recovery is also exposed
to global risks related to possible
problems in China and some other
large emerging economies leading
to further volatility and weakness
in international financial markets.
However, there are also upsides
associated with the gradual recovery
we have seen in the Eurozone economy,
which we expect to be only slightly
dampened by Brexit.
• The Bank of England seems likely
to relax monetary policy in the short
term through a mixture of lower
interest rates, asset purchases and
credit easing, which should help
to support growth.
• We would also expect fiscal policy
to be reasonably supportive, with
public borrowing allowed to rise to
take the strain of slower growth and
possible cuts in corporation tax rates
to support business investment.
Introduction
In this section of the report we
describe recent developments in
the UK economy and review future
prospects. The discussion covers:
Section 2.1
Recent developments

and the immediate

impact of Brexit
Section 2.2
Economic growth

prospects after Brexit:

national, sectoral

and regional
Section 2.3
Outlook for inflation

and real earnings growth
Section 2.4
Monetary and fiscal

policy options
Section 2.5
Summary and conclusions
8
UK Economic Outlook July 2016
Figure 2.2 – Purchasing Managers’ Indices of business activity
Source: Markit/CIPS
30
35
40
45
50
55
60
65
2016
Jan
2015
Jan
2014
Jan
2013
Jan
2012
Jan
2011
Jan
2010
Jan
2009
Jan
2008
Jan
2007
Jan
Services
Manufacturing
Services
Manufacturing
Above 50
indicates
rising activity
levels
2.1 Recent developments
and the immediate
impact of Brexit
UK economic growth slowed from
around 3% in 2014 to around 2% in the
year to Q1 2016. This slowdown reflects
sluggish global growth as well as, more
recently, uncertainty related to the
outcome of the EU Referendum.
The general pattern, as shown in
Figure 2.1, was for services sector
growth to remain relatively strong,
while the recoveries in manufacturing
and construction have stalled recently.
This pattern has also been seen in the
generally stronger trends in purchasing
managers’ indices (PMIs) for services
and manufacturing, although the latter
did see a pick-up in June ahead of the
referendum while the services PMI
fell back somewhat (see Figure 2.2).
Consumer spending remained relatively
robust in the run-up to the referendum,
but business investment growth turned
negative in late 2015 and early 2016.
Commercial property transactions and
financial market deals both fell back
significantly as investors waited for the
EU referendum result.
Following the vote to leave the EU on 23rd
June, the most immediate effects were
seen in financial markets. Most obviously
there was a sharp fall in sterling (see
Figure 2.3), particularly against the dollar
where it fell to its lowest levels since the
mid-1980s. The fall against the euro was
less marked, remaining within the normal
trading zone of recent years (although
lower than it had been previously
during 2016 as the chart shows).
Figure 2.1 – Sectoral output and GDP trends
Source: ONS
75
80
85
90
95
100
105
110
115
2016 Q1
2015 Q1
2014 Q1
2013 Q1
2012 Q1
2011 Q1
2010 Q1
2009 Q1
2008 Q1
2007 Q1
In
de
x
(Q
1
20
07
=
1
00
)
Services
Manufacturing
GDP
Construction
Services
GDP
Manufacturing
Construction
9
UK Economic Outlook July 2016
Stock markets have also been very
volatile, with the FTSE 100 first falling
and then rising in the week after the
referendum. The rapid recovery seems
to reflect a number of factors, including:
• The FTSE 100 having a heavy weight
of global multinationals influenced
by wider international trends not just
what is happening in the UK. The more
domestically-focused FTSE 250
saw a larger fall though it has also
recovered to a more modest degree
from the initial shock (see Figure 2.4).
• The weak pound raised the value
of overseas earnings in sterling,
which again particularly supported
the FTSE 100 where these overseas
earnings are more important than
for the FTSE 2050.
• Gilt yields fell sharply and remain
very low, in part due to a flight to
safety and in part due to lower
expected official interest rates in the
UK following Brexit. This implied a
rise in the price of bonds, which made
equities look cheaper by comparison
and so supported their rebound from
initial post-Brexit lows.
• There has been particular weakness
in commercial property funds,
leading some of them to suspend
investor withdrawals in early July to
prevent forced sales of illiquid assets.
The Bank of England is monitoring
this situation carefully for any signs
of further contagion.
It would be wrong to draw overly strong
conclusions from these early market
gyrations, and we would expect
continued financial volatility going
forward. But some of these movements
– a weak pound and lower interest rates
– seem likely to be lasting effects of
Brexit and are factored into our view
of future UK economic prospects.
Trends in equity markets are much
less clear at this early stage.
Figure 2.3 – US dollar and euro exchange rates against the pound
Sources: Thomson Reuters Datastream
1.0
1.1
1.2
1.3
1.4
1.5
1.6
Jul
2016
Jun
2016
May
2016
Apr
2016
Mar
2016
Feb
2016
Jan
2016
US Dollar
Euro
EUR/£
USD/£
Figure 2.4 – UK equity market indices
Source: Thomson Reuters Datastream
80
85
90
95
100
105
110
Jul
2016
Jun
2016
May
2016
Apr
2016
Mar
2016
Feb
2016
Jan
2016
In
de
x
(J
an
ua
ry
1
st
, 2
01
6
=
1
00
)
FTSE 100
FTSE 250
FTSE 250
FTSE 100
10 UK Economic Outlook July 2016
2.2 Economic growth
prospects after Brexit:
national, sectoral
and regional
Prior to the Brexit vote, we were expecting
UK growth to dip to 1.9% in 2016 before
recovering to 2.3% in 2017. Following
the EU referendum result, we have
revised down our growth projections
significantly for the second half of 2016
and 2017, with the level of GDP being
around 2.5% lower by the end of 2017
than in our previous main scenario,
which was conditioned on the UK voting
to remain in the EU. This produces the
average annual growth rates shown in
Table 2.11.
Overall, we still expect growth to remain
positive on average in 2017, with the
economy narrowly avoiding recession
and starting to recover later next year
as negotiations with the EU proceed.
We assume here that monetary policy
is supportive (as discussed further in
Section 2.4 below), public borrowing is
allowed to rise in the short term to absorb
some of the impact of slower growth, and
that some progress is made during 2017
on negotiating a free trade deal with the
EU, even though all the details of this are
unlikely to be agreed until later.
Consumer spending growth remained
strong in the first half of 2016, but we
expect a moderation in this later in 2016
and into 2017, so that annual growth falls
to around 1.3% next year. This reflects
a squeeze on real earnings growth from
a stronger pound raising import prices,
as well as weaker employment and,
as discussed in detail in Section 3 below,
slower house price growth.
Table 2.1 - PwC main scenario for UK growth and inflation
% real annual growth
unless stated otherwise
2015
2016p
2017p
GDP
2.2%
1.6%
0.6%
Consumer spending
2.6%
2.5%
1.3%
Government consumption
1.4%
1.4%
0.8%
Fixed investment
3.3%
-1.4%
-4.6%
Domestic demand
2.5%
1.4%
0.3%
Net exports (% of GDP)
-0.5%
-0.2%
0.3%
CPI inflation (%: annual average)
0.0%
0.7%
1.8%
Source: ONS for 2015, PwC main scenario projections for 2016-17
The main drag on growth will come
from business investment, which had
already weakened before the referendum
and is likely to be particularly hard hit
by the vote to leave the EU. This will be
particularly true of foreign investment
in commercial property and in sectors
aimed at accessing the EU single market.
While we assume some kind of free
trade agreement is eventually reached
with the EU, this will take time and
(given the need to increase control
over immigration) will almost certainly
involve some reduction in access to the
EU single market relative to the current
position. Even if tariffs on goods are
largely avoided, non-tariff barriers
are likely to increase.
Government consumption growth will
be less affected, but is likely to remain
moderate in line with previously
announced plans (although these could be
revised in November’s Autumn Statement).
UK net exports may move in a more
favourable direction, making a positive
contribution to GDP growth in 2017 as
import demand weakens and the fall in
the pound helps exports and import
substitutes to become more competitive.
This should also help to moderate the
large current account deficit, which helps
to explain the weakness of sterling.
Overall, our growth projections are
broadly similar to the latest average of
independent forecasters, which see UK
growth falling to around 0.4% in 2017.
But all economic projections are subject
to particularly large uncertainties at
present after the shock of the Brexit vote.
1 These projections are calibrated to be broadly consistent with the ‘Free Trade Agreement’ (FTA) scenario in our March 2016 report for the CBI on the economic
implications of leaving the EU, which is available here:
http://www.pwc.co.uk/services/economics-policy/insights/implications-of-an-eu-exit-for-the-uk-economy.html
11
UK Economic Outlook July 2016
Alternative growth scenarios –
businesses need to make
contingency plans
To reflect these uncertainties, we have
also considered two alternative UK
growth scenarios, as shown in Figure 2.5.
• Our ‘early recovery’ scenario
projects growth to dip in the next
few quarters before picking up again
to around 1.5% on average in 2017.
This is a relatively optimistic
scenario which assumes that good
early progress is made on retaining
access to the EU single market and
that there are favourable trends in
US and euro area growth.
• On the other hand, our ‘recession
scenario’ sees UK GDP growth fall to
around -1% in 2017 as the global
outlook worsens and there is little
progress in early negotiations with
the EU, suggesting that the UK may
have to fall back on WTO rules with
consequent imposition of tariffs on
trade with the EU. This would deepen
and prolong the period of uncertainty
around the outcome of Brexit,
reducing investment, jobs and growth.
Figure 2.5 – Alternative UK GDP growth scenarios
-8
-6
-4
-2
0
2
4
6
2017
Q1
2016
Q1
2015
Q1
2014
Q1
2013
Q1
2012
Q1
2011
Q1
2010
Q1
2009
Q1
2008
Q1
2007
Q1
Projections
%
c
ha
ng
e
on
a
y
ea
r e
ar
lie
r
Main scenario
Recession
Early recovery
Pre-Brexit scenario
Source: ONS, PwC scenarios
We do not believe that these two
alternative scenarios are the most likely
outcome, but they are certainly possible
and, at present, risks do appear to be
weighted to the downside given the
political and economic uncertainties
posed by the EU referendum result.
Businesses would therefore be well
advised to make appropriate contingency
plans for such less favourable outcomes,
but without losing sight of the more
positive possibilities for the UK
economy should these downside
risks not materialise.
12 UK Economic Outlook July 2016
More generally, companies should be
making detailed contingency plans for
the immediate impact of Brexit2 on all
Table 2.2: Key issues and questions for businesses preparing for Brexit
Issues
Implications
Questions
Trade
The EU is the UK’s largest export partner, accounting for
around 45% of total UK exports – leaving the EU is likely to
make trade with EU more difficult.
• How much do you rely on European countries for revenue
growth?
• Have you reviewed your supply chain to identify the impact
of tariffs on your procurement?
• Have you identified which third party contracts would
require a renegotiation in the event of a Brexit?
Tax
Contributions
The UK would no longer be required to make a financial
contribution to the EU and would gain more control over VAT
and some other taxes.
• Have you thought about the impact of potential changes
to the EU tax framework?
• Have you upgraded your systems to deal with a significant
volume of tax changes?
Regulation
The UK is subject to EU regulation. Brexit may mean less red
tape. It could also mean that UK businesses could have to
adapt to a different set of regulations, which could be costly.
• Have you quantified the regulatory impact of Brexit to keep
your stakeholders up-to-date?
• How flexible is your IT infrastructure to deal with potential
changes to Data Protection laws?
• How ready is your compliance function to deal with potentially
new reporting requirements arising from Brexit?
Sectoral
effects
The UK is the leading European financial services hub,
which is a sector that could be significantly affected by Brexit.
Other sectors which rely on the EU single market will also
feel a strong impact.
• Have you briefed potential investors on the impact of
Brexit for your sector and organisation?
• How up-to-date are your contingency plans in place
to deal with Brexit?
• Are you aware of the impact of illiquidity and volatility
in financial markets on your capital raising plans?
Foreign
direct
investment
FDI from the EU made up around 46% of the total stock
of FDI in the UK in 2013. Brexit could put this inbound
investment at risk.
• How much do your rely on FDI for growth?
• Have you considered alternative sources of funding aside
from banks?
• How are your competitors responding to the risk of Brexit?
• Have you informed your investors on your plans for
a post-Brexit UK?
Labour
market
The UK may change its migration policies. Currently EU
citizens can live and work in the UK without restrictions.
Business will need adjust to any change in this regime.
• How reliant is your value chain on EU labour?
• Have you communicated with your UK employees from
elsewhere in the EU?
• Have your compliance function considered the additional
cost of hiring foreign labour?
Uncertainty
Uncertainty has increased since the referendum and may
continue into the negotiation period.
• Can you manage volatility in the Sterling exchange rate?
• Have you communicated your stance on Brexit to your key
stakeholders, customers and suppliers?
•
Is your organisation ready for a worst-case scenario where
there is a prolonged period of uncertainty?
aspects of their businesses, covering the
kind of questions listed in Table 2.2.
2 For more material on the potential impact of Brexit on your business, please see our EU Referendum hub here: http://www.pwc.co.uk/the-eu-referendum.html
13
UK Economic Outlook July 2016
Table 2.3: UK sector dashboard
Growth
Sector and GVA share
2015
2016
2017 Key issues/trends
Manufacturing (10%)
-0.1%
-0.7%
-1.0% Manufacturing PMI rose in June, but activity trends generally weak over
past year
Capital goods manufacturers vulnerable to fall in investment after vote
to leave EU
But exporters should gain from weaker pound, limiting the fall in total output
Construction (6%)
4.2%
-0.7%
-2.0% The construction sector fell back in the second half of 2015 and early 2016,
with the June PMI the weakest in seven years
Our projections reflect the high vulnerability of construction projects to
delay or cancellation after Brexit vote
Distribution, hotels & restaurants
(14%)
4.6%
3.8%
1.2% ONS figures show that retail sales volume growth was healthy up to May,
but consumer confidence and spending may be hit by vote to leave
Prices continue to fall on the high street and online due to fierce competition
Slower real earnings growth and possible job cuts could hit retail, hotels
and restaurant spending after vote to leave EU
Business services and finance (32%)
2.9%
2.1%
1.1% Business services and finance sector saw some slowdown in early 2016
and could be vulnerable to shift of some financial services out of London/
UK due to Brexit
Financial sector also faces regulatory challenges but business services
have been stronger and should recover after Brexit
Government and other services (23%)
0.3%
1.4%
1.2% Civil service and local authority spending is expected to be cut back in real
terms over the next few years, but growth should remain positive for the
NHS and schools
Tax and spending plans to be reviewed in Autumn Statement
Total GDP
2.2%
1.6%
0.6%
Sources: ONS for 2015, PwC for 2016 and 2017 main scenario projections and key issues.
These are five of the largest sectors but they do not cover the whole economy - their GVA shares only sum to around 85% rather than 100%.
Construction hardest hit, but all
sectors likely to slow due to Brexit
The sector dashboard in Table 2.3 shows
the actual growth rates for 2015 along
with our projected growth rates for 2016
and 2017 for five of the largest sectors
within the UK economy. The table also
includes a summary of the key issues
affecting each sector.
The outlook is clearly stronger for private
non-financial services than other sectors,
but all are likely to be negatively affected
by leaving the EU.
Construction may be hardest hit due to its
reliance on large scale capital investment
projects that may be particularly prone to
be delayed or even cancelled due to
uncertainty following the vote to leave
the EU. Commercial property is also
being hit hard, particularly in London.
Manufacturers of capital goods may
also be hard hit for the same reasons,
although some exporters will gain
from the weaker pound.
Financial services companies could
also be affected by any loss of access
to EU markets, notably through the
possible loss of ‘passporting’ rights
for UK-based firms3.
3 The potential impact on financial services was considered in detail in our April 2016 report for TheCityUK, which can be accessed here:
http://www.pwc.co.uk/industries/financial-services/insights/leaving-the-EU-implications-for-the-UK-financial-services-sector.html
14 UK Economic Outlook July 2016
Regional prospects: all parts of the
UK likely to see slower growth due
to Brexit
London is expected to continue to lead
the regional growth rankings in 2016,
expanding by around 2.2% as shown
in Figure 2.6. Most other regions are
expected to expand at rates closer
to the UK average of around 1.6%,
but Northern Ireland is expected to
lag behind somewhat with growth
of around 1%.
More marked slowdowns are expected
in all regions in 2017 as the effects of
the vote to leave the EU come through,
though we are not projecting negative
growth in any region in our main
scenario. Growth in London might fall
to just over 1% in 2017, while it could
be close to zero in Northern Ireland.
Figure 2.6 – PwC main scenario for output growth by region in 2016 and 2017
0.0
0.5
1.0
1.5
2.0
2.5
N Ireland
West
Midlands
Wales
North
East
Scotland
Yorkshire &
Humberside
North
West
East
Midlands
East
South
West
UK
South East
London
%
g
ro
w
th
b
y
re
gi
on
2016
2017
Source: PwC analysis
It is important to note that regional output
data are published on a much less timely
basis than national data. As a result, the
margins of error around these regional
projections are even larger than for the
national growth projections and so they
can only be taken as illustrative of broad
directional trends.
There is also a strong case to look at a
broader range of indicators of regional
economic performance, as discussed
further in Section 4 of this report.
This focuses in particular on the relative
performance and prospects of the Northern
regions of England. The geographically
divided nature of the EU vote arguably
reinforces the case for further investment
to promote growth in the Northern
Powerhouse and other regions outside
London. It could also raise further
issues around devolution in Scotland
and elsewhere.
2.3 Outlook for inflation
and real earnings growth
Consumer price inflation (CPI) remained
low at 0.3% in the year to May. The major
cause of this persistently subdued inflation
has been the low level of global prices for
oil and other commodities, but unit labour
cost growth also remained low despite the
tightening of the labour market in recent
years. Looking ahead, however, the 12
month inflation rate will tend to rise back
to target as earlier commodity price
declines fall out of the index and the
effects on import prices of the recent fall
in the pound feed through. But weaker
demand due to the vote to leave the EU
will offset this to some degree in 2017
and beyond.
15
UK Economic Outlook July 2016
Figure 2.8 – CPI inflation vs average earnings growth
Source: ONS, PwC analysis
0
1.0
2.0
3.0
4.0
5.0
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
Average weekly earnings (excl bonus)
CPI
%
c
ha
ng
e
p.
a.
Projections
Real squeeze
Earnings
CPI
Alternative inflation scenarios
In our main scenario we are projecting an
average consumer price inflation rate of
0.7% in 2016, which we have revised up
since our last Economic Outlook report in
the face of the recent weakness of the
pound and a modest recovery in oil prices
since February. We project a gradual rise
back to close to the 2% target rate by the
end of 2017 (see Figure 2.7) as these
commodity price effects are assumed to
fall out of the 12 month inflation rate
calculation and the effect of the recent
fall in the pound comes through. But this
is subject to particularly significant
uncertainties at present due to the
offsetting effects of the vote to leave on
the pound and on aggregate demand.
To capture these we have also considered
two alternative scenarios for UK
inflation:
• In our ‘high inflation’ scenario we
project inflation to rise to over 3% in
2017 as a result of the weaker pound
and a possible pick-up in global
commodity prices if other economies
grow more strongly.
• In our ‘low inflation’ scenario, by
contrast, the UK and Eurozone
economies weaken by more in the
aftermath of Brexit, as do global
commodity prices. In this case UK
inflation could remain close to zero.
As with our GDP growth scenarios, these
two alternative variants are not as likely
as our main scenario. But given recent
volatility and uncertainty, businesses
should plan for a broad range of outcomes
after Brexit.
Consumer price inflation exceeded
earnings growth for six consecutive
years following the onset of the 2008-9
recession, which was in marked contrast
to pre-crisis norms. Positive real
earnings growth resumed in 2015 and
early 2016 as consumer price inflation
Figure 2.7 – Alternative UK inflation (CPI) scenarios
Source: ONS, PwC scenarios
Projections
-1.0
0
1.0
2.0
3.0
4.0
5.0
2017
Q1
2016
Q1
2015
Q1
2014
Q1
2013
Q1
2012
Q1
2011
Q1
2010
Q1
%
c
ha
ng
e
on
a
y
ea
r e
ar
lie
r
Main scenario
Low inflation
High inflation
Inflation target = 2%
Inflation target
fell to close to zero, but nominal earnings
growth in cash terms was still only
around 2%, which remains weak by
historical standards.
We had been assuming a gradual
pick-up in earnings growth in 2016-17,
but this is now much less clear after the
vote to leave the EU. On the one hand,
somewhat higher consumer price inflation
due to the weaker pound could feed
through into higher nominal earnings
growth, but on the other hand this could
be offset by weaker economic growth
and so labour demand after Brexit.
Balancing these two effects, our
preliminary projection is that earnings
growth remains fairly flat in 2016-17
at just over 2% in cash terms, with real
earnings growth declining slightly in
2016 and more markedly in 2017.
But there are considerable uncertainties
around any such projections at present.
16 UK Economic Outlook July 2016
2.4 Monetary and fiscal
policy options
Monetary policy expected to be
loosened in short term
The Financial Policy Committee
(FPC) has already taken early action
by eliminating the 0.5% countercyclical
capital buffer for UK banks. The FPC
estimates that this could add up to
£150 billion to bank lending capacity,
although there is no guarantee that this
will be used if the demand for loans is
not there, or if banks remain
understandably cautious about new
lending following the Brexit vote.
The Monetary Policy Committee (MPC)
is expected to loosen monetary policy
over the summer, as has already been
signalled by the Governor of the Bank of
England. This could combine a number
of measures including rate cuts, asset
purchases and credit easing
(e.g. through extension of the
Funding for Lending Scheme).
We would not expect this action to offset
all of the negative demand effects of the
vote to leave the EU, but they should
offer continued support to asset prices
and could dampen the blow to business
investment and economic growth to
some degree.
Public borrowing higher
as growth slows
The UK budget deficit stood at around
£75 billion in 2015/16 and initial
evidence is that it was falling only very
slowly in early 2016/17 even before the
EU referendum. After the vote to leave,
it seems likely (as the Chancellor has
recognised) that budget deficit
projections will need to be revised up
significantly in both the short term and
the medium term. We would expect the
fiscal automatic stabilisers4 to be
allowed to operate in full to dampen
somewhat the potential negative impact
on growth from the vote to leave the EU.
The former Chancellor, George Osborne,
also mentioned the possibility of further
corporate tax cuts in the medium term,
on top of existing plans to reduce the
main rate to 17% by 2020, in order to
incentivise inward investment in
particular after Brexit. But it remains
to be seen if the new government will
pursue this proposal.
Specific fiscal policy measures and
updated official public borrowing
projections have been delayed until the
Autumn Statement. We will update our
own public borrowing projections ahead
of this statement in the light of emerging
evidence on the fiscal impact of the vote
to leave the EU.
2.5 Summary and
conclusions
UK economic growth slowed a little in
2015 and early 2016, but remained close
to its long-term trend at around 2% per
annum prior to the EU referendum.
However, the vote to leave seems likely
to lead to a significant slowdown in the
UK economy.
In our main scenario, we project UK growth
to fall to around 1.6% in 2016 and around
0.6% in 2017, narrowly avoiding recession.
This assumes some monetary loosening
to support growth and reasonable early
progress over the next 12-18 months in
negotiating a free trade deal with the EU.
It also assumes no major new adverse
shocks to the global or EU economies.
The main reason for this significant
slowdown in UK growth is projected to
be a downturn in business investment,
which will particularly hit the
construction, commercial property
and capital goods sectors. Consumer
spending growth is also projected to
slow to just over 1% in 2017 from close
to 3% recently, reflecting slower real
income growth (partly due to higher
import prices) and possible job losses.
But stronger net exports, helped by the
weaker pound, should dampen the scale
of the fall in overall GDP growth.
There are considerable uncertainties
around any such projections at present,
with risks being weighted to the downside
until the negotiating position with the EU
becomes clearer. But there could also be
longer term opportunities for UK businesses
from trade with other parts of the world if
they can ride out the short term economic
storm. This will require companies to
perform a stocktake of the possible impacts
of Brexit across all areas of their operations
in order to identify and respond to
consequent risks and opportunities
as early and effectively as possible.
4 This refers to the fact that, as economic growth slows and employment declines, so social security benefit and tax credits payments tend to rise automatically
and average effective tax rates tend to fall.
17
UK Economic Outlook July 2016
3 – UK Housing market outlook
Introduction and key
findings
In this section, we review recent trends
in the housing market and present
projections for house price growth in the
UK and its regions. We also present new
research that outlines the dramatic
changes in the affordability of housing
for 20-39 year olds (who we refer to as
“generation rent”).
Our key findings are:
• The decision by the UK public to
leave the EU (‘Brexit’) has shaken
the property market. We anticipate
a marked slowdown as a result, with
house price growth decelerating to
3% in 2016 and 1% in 2017 in our
main scenario. But prices should still
rise – we are not projecting a house
price crash in our main scenario,
although there are considerable
uncertainties around any such
projection and risks appear to be
weighted to the downside at present.
• After this initial dip in UK house
price growth, our main scenario
projects a gradual recovery, with
price growth picking up again to
around 4% in 2018 and 6% in 2019.
Thereafter, we expect growth to
average around 5-6% per annum
from 2020 to 2025 as persistent
supply shortages keep house prices
rising faster than earnings on average.
• The impact of Brexit will vary by
region, but we expect it to be most
acute in the London market. By 2018,
we estimate house prices in London
could be around £60,000 lower than
if the UK had voted to remain; this
contrasts to a difference of around
£10,000 in Scotland and just £8,000
in the North East.
• But we would stress that these
are estimated differences from an
expected steady upward path for
regional house prices without Brexit.
In our main scenario, the absolute
level of house prices should still be
higher in all regions in 2018 than in
2015 despite the dampening effect
of the Brexit vote.
• Our new research into housing
affordability for generation rent
shows that buyers may now have to
save for 19 years in order to buy their
first home (assuming the deposit has
to be raised entirely from their own
savings without family assistance).
In 2000, the same group would have
been able to buy after saving for just
6 years; and in 1990 it took only
around 2 years.
• The affordability analysis shows a
huge disparity in outcomes between
renters and those 20-39 year olds
who have already managed to get
a foot on the housing ladder.
This group has been largely insulated
from the deterioration in affordability
due to capital gains made on their
existing homes.
• The good news for generation
renters is that Brexit may actually
help them get on the ladder slightly
sooner as we expect it to slow the
pace of house price growth.
Unfortunately, the effect is small,
as we estimate a generation renter
starting to save in 2016 can now buy
in 2035, rather than 2037 if the UK
had voted to remain.
The discussion below begins by briefly
reviewing recent housing market
developments (Section 3.1) and then
goes on to assess future UK and regional
house price prospects, taking into
account the potential impact of Brexit
(Section 3.2). Section 3.3 presents our
new research into the affordability of
housing for generation rent. Further
details of our modelling work are
contained in the technical annex.
18 UK Economic Outlook July 2016
3.1 Recent housing
market developments
The EU referendum result has been a
shock to the UK economy and the housing
market. Shares in homebuilders have
been amongst the worst performers on
the FTSE. Some estate agents have issued
profit warnings and predicted
significantly lower revenue this year
because of the referendum result.
Anecdotal evidence suggests that buyers
are pulling out of transactions and sellers
are cutting asking prices on UK property.
The main reason for this is increased
political and economic uncertainty,
which could impact the housing market
through four key channels:
1. The deterrence of foreign investment
in the UK (which particularly affects
the central London market, but also
has wider economic impacts).
2. Uncertainty regarding the future of
EU nationals in the UK (and those
considering moving to the UK).
3. A reduction in consumer confidence
leading to buyers deferring or
renegotiating transactions.
4. Turbulence in the UK banking sector,
which provides the vast majority of
mortgage funding for housing
transactions.
Prior to the referendum, house prices in
the UK were growing briskly. As shown
in Figure 3.1, the slowdown of early
2015 proved temporary and, by March
2016, UK house prices were growing at
8.5% per annum and the average house
was valued at around £209,0001.
This was supported by an upsurge in
transactions in February and March as
buyers rushed to avoid the new stamp
duty surcharge for properties that are
not the buyer’s principal residence,
which was introduced in April 2016.
Figure 3.1 – Annual UK house price rates of change (using new HPI)
Source: ONS
-20
-15
-10
-5
0
5
10
15
20
Jan
2016
Jan
2015
Jan
2014
Jan
2013
Jan
2012
Jan
2011
Jan
2010
Jan
2009
Jan
2008
Jan
2007
Jan
2006
Ye
ar
-o
n-
ye
ar
%
c
ha
ng
e
1 The house prices shown in Figure 3.1 and used throughout this article are from the new official House Price Index (HPI), first published by the ONS in June 2016.
Due to changes in methodology, as explained in more detail in Box 3.1, this new data series has substantially different price estimates to the old ONS series.
In particular, the new series has lower estimates of average house price levels, but still shows broadly similar trends over time.
19
UK Economic Outlook July 2016
3.2 House price prospects
– the impact of Brexit
In this section, we present our projections
for house price inflation in the UK and
regional markets. We use econometric
models to make our predictions.
These link trends in prices to underlying
economic drivers and use these
relationships to project how prices
may evolve in the future.
We changed our projections following
the EU referendum result to reflect the
new weaker economic outlook described
in Section 2 above, and the likelihood
of greater caution exercised by
homebuyers and lenders. This allows
us to compare the scenarios before and
after the Brexit vote (see Figure 3.2).
In our new post-Brexit main scenario,
we anticipate that the results of the EU
referendum will weigh significantly on
the market in the short term. UK house
price growth is expected to decline from
6.0% in 2015 to 3.1% in 2016, followed
by 0.9% growth in 2017. This contrasts
to our ‘pre-Brexit’2 projections of 5.2%
house price growth in 2016 and 5.3%
in 2017. We expect the market to
strengthen from 2019 onwards and it
has the potential to slightly outperform
the pre-Brexit scenario as weaker house
building exacerbates the long running
supply shortage. There is also some
cyclical rebound in house price growth
after the dip in 2016-18.
By 2018, the cumulative difference
between house prices in our main
scenario and our pre-Brexit scenario
is around 8%. This is equivalent to
a reduction of around £17,000 in the
average UK house price when compared
to the pre-Brexit scenario (see Table 3.1).
Figure 3.2 – UK house price inflation: main scenario projections with and without Brexit
Source: ONS historic data, PwC analysis
Table 3.1: UK house price inflation – the potential impact of the Brexit vote
Year
Main scenario
Pre-Brexit
scenario
Difference
(%)
Cumulative price
difference (£)
2016
3.1%
5.2%
-2.1%
-£4,000
2017
0.9%
5.3%
-4.4%
-£13,000
2018
4.0%
5.6%
-1.6%
-£17,000
Total change
(2016-18)
8%
16%
-8%
-£17,000
Source: PwC analysis based on ONS house price index
Projections
-15
-10
-5
0
5
10
15
20
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
Pre Brexit Scenario
Main Scenario
%
c
ha
ng
e
ye
ar
-o
n-
ye
ar
2 By ‘pre-Brexit’ we mean the projections we made prior to the vote to leave the EU on the assumption of the status quo continuing, not prior to the UK actually leaving
the EU, which will not occur for some years.
20 UK Economic Outlook July 2016
Looking at the regional picture, we expect
Brexit will affect the London market
more severely than other parts of the
UK. London has a greater share of
international buyers and residents,
plus our regional GVA projections
(see Figure 2.6 in Section 2) suggest
that London could see a more significant
short term reduction in growth than
elsewhere due to Brexit.
Figure 3.3 shows the contrast in projected
regional house prices in 2018 between
the pre-Brexit scenario and our new
main scenario. In London, we estimate
that prices will be around £60,000 lower
than if the UK had voted to remain
(although they are still expected to
grow relative to their 2015 level).
The estimated difference is around
£30,000 in the South East and £23,000
in the East of England. The relative
fall in prices is expected to be under
£20,000 for the South West, around
£15,000 for the Midlands, and closer
to £10,000 for other regions.
Figure 3.3 – Cumulative house price impact of Brexit vote relative to pre-Brexit outlook (by 2018)
Source: PwC analysis based on ONS house price index
-70,000
-60,000
-50,000
-40,000
-30,000
-20,000
-10,000
0
North
East
Northern
Ireland
Scotland
Wales
North
West
Yorkshire
and
The Humber
East
Midlands
West
Midlands
Region
South
West
East of
England
South
East
London
Ch
an
ge
in
a
ve
ra
ge
h
ou
se
p
ric
e
re
la
tiv
e
to
p
re
-B
re
xi
t s
ce
na
rio
(£
)
Despite this, our main scenario is that
house prices will continue to grow in
most regions. As set out in Table 3.2,
Scotland is the only region where we
anticipate prices declining in 2016-17
and this is only temporary.
Our regional projections for 2017 show
a subdued market compared to the past
three years. House price growth in 2017
is expected to be under 2% for all regions,
and negative for Scotland, the Midlands,
the North West and Yorkshire. From 2018
to 2020 we project in this main scenario
that house prices will recover consistently
across the UK. This is driven by an
assumed recovery in credit conditions,
earnings growth and also reflects
underlying housing supply constraints.
21
UK Economic Outlook July 2016
Table 3.3 shows how these growth rates
translate into projected regional house
price values under our main scenario.
Despite experiencing a relatively sharp
downturn in price growth, London
house prices remain on an upward track.
Average prices in the capital are
expected to reach around £530,000
by 2020, over three times the price of
the average home in Yorkshire & the
Humber and the North of England.
All of the figures presented above are
those for our main scenario, but projecting
house prices always involves significant
uncertainties – particularly in the
current environment after the Brexit
vote. In the following sub-section we
therefore present high and low house
price growth scenarios out to 2025.
Table 3.2: Regional house price growth in PwC main scenario
Region
2015
2016
2017
2018
2019
2020
East of England
9.8%
5.7%
1.9%
4.0%
6.1%
6.0%
Yorkshire & The Humber
4.0%
1.1%
-0.6%
3.9%
5.2%
5.2%
South West
6.0%
3.7%
1.8%
4.1%
5.7%
5.7%
West Midlands
4.8%
1.6%
-0.2%
3.9%
5.3%
5.3%
London
10.2%
5.9%
0.6%
4.1%
6.0%
6.0%
North West
3.7%
0.6%
-0.7%
3.9%
5.3%
5.2%
South East
8.9%
5.2%
1.0%
3.9%
6.0%
6.0%
North East
2.3%
0.4%
0.0%
3.9%
5.0%
4.9%
East Midlands
5.5%
1.9%
-0.3%
4.0%
5.9%
5.8%
Wales
2.8%
1.3%
0.8%
3.9%
5.8%
5.8%
Scotland
4.0%
-1.6%
-0.4%
4.2%
5.7%
5.7%
Northern Ireland
7.3%
1.7%
0.2%
4.3%
4.8%
4.7%
UK average
6.0%
3.1%
0.9%
4.0%
5.9%
5.8%
Source: PwC analysis based on ONS house price index
Table 3.3: Regional house price values (£000’s) in the main scenario
Region
2015
2016
2017
2018
2019
2020
East of England
240
254
258
269
285
302
Yorkshire & The Humber
142
143
143
148
156
164
South West
219
227
231
240
254
269
West Midlands
165
167
167
173
183
192
London
425
450
452
471
500
530
North West
140
141
140
145
153
161
South East
277
291
294
306
324
344
North East
121
122
122
127
133
139
East Midlands
160
163
162
169
179
189
Wales
139
140
142
147
156
165
Scotland
137
135
134
140
148
156
Northern Ireland
115
117
118
122
129
135
UK average
198
204
206
214
227
240
Source: PwC analysis based on ONS house price index
22 UK Economic Outlook July 2016
Alternative UK house price scenarios
We have constructed two alternative
house price inflation scenarios which
capture a broad range of possible
outcomes (see Figure 3.4).
Our high scenario reflects a resilient
macroeconomic environment. Earnings
growth is largely unaffected by the EU
referendum outcome, housing stock
growth weakens marginally in 2016
before rising thereafter, but there is
further easing in mortgage lending as the
Bank of England embarks on additional
monetary and credit easing over the next
few months. This combination of factors
leads to a shallower downturn in house
price growth in 2016-17 and stronger
average growth of around 8% for the
period 2020 to 2025.
Our low scenario reflects a more severe
credit contraction associated with weak
employment growth, falling real
earnings and prolonged macroeconomic
uncertainty. In this scenario a sharp
contraction in housebuilding does apply
some counterbalancing support for
prices, but this is far outweighed by
the other negative factors assumed here.
In the medium-term, the low scenario
assumes very modest real earnings
growth and extended sluggishness in
mortgage lending as Brexit uncertainty
persists during a long and difficult trade
negotiation with the EU.
As shown in Table 3.4, in our main
scenario the average UK home reaches
approximately £240,000 in 2020, while
in the high scenario it could reach around
£270,000. By contrast, in the low
scenario, average UK house prices could
fall to around £190,000 in 2017 before
recovering to around £205,000 by 2020.
Figure 3.4 – Alternative UK house price inflation scenarios
Source: PwC analysis based on ONS house price index
Projections
-15
-10
-5
0
5
10
15
20
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
High Scenario
Main Scenario
Low Scenario
%
c
ha
ng
e
ye
ar
-o
n-
ye
ar
Table 3.4: Alternative scenarios for UK average house prices (£000s)
Year
Low
Main
High
2015
198
198
198
2016
197
204
207
2017
191
206
215
2018
193
214
230
2019
198
227
250
2020
205
240
271
Source: PwC analysis based on ONS house price index
23
UK Economic Outlook July 2016
Box 3.1 – The revised ONS house price index
In June, the Office for National
Statistics (ONS) published the first
edition of their new official House
Price Index (HPI). Previously, the
Land Registry and ONS published
separate indices but in recent years
these have been diverging. The new
HPI will replace both these indices by
providing a single consistent series.
This new index was developed
following a consultation in 2014,
which highlighted the limitations of
the previous ONS measure. The new
methodology aims to address this
with the following new features:
1.
Inclusion of both cash sales
and new dwellings to provide
full coverage of the market.
2. Use of the geometric rather than
the arithmetic mean when
calculating average prices – this
reduces the sensitivity of the
index to very high value property
transactions and, as a result,
reduces average prices compared
to the old ONS index.
3. A revised calculation process to
ensure the index is representative
of the current housing market.
4. Publication of average prices which
are now comparable over time.
As Figure 3.5 shows, the new HPI lies
in between the two previous indices.
Compared with the previous ONS
HPI, this new index is consistently
lower and suggests that house prices
have grown at a slower rate in the past
5 years. The difference is significant as
average prices for the new measure
are £75,000 lower than the old ONS
series. This seems primarily to reflect the
lower weight given to high value property
transactions (particularly in London)
due to switching from arithmetic to
geometric averaging. This switch
was also a feature of the move from
RPI to CPI to measure consumer price
inflation and is generally regarded
as more methodologically robust.
Compared with the old Land Registry
index, the new HPI is slightly higher
but has a similar trend over time.
The main difference is due to the
updated composition of properties
on which the index is based. Previously,
the Land Registry index was based
on a set of properties from April 2000,
whereas the new HPI is representative
of the current market. The Land Registry
index was also only for England & Wales.
The new HPI index will be
published on a monthly basis going
forward but there is a time lag, so
the latest available data at the time
of writing is for April 2016. The first
official post-referendum data for
July will not be published until
mid-September, although other less
comprehensive house price indices
will be published before then by
mortgage lenders and estate agents.
Figure 3.5 – Comparison of new UK HPI with old ONS and Land Registry
(LR) indices
Source: ONS
0
50
100
150
200
250
300
350
Jan
2016
Jan
2015
Jan
2014
Jan
2013
Jan
2012
Jan
2011
Jan
2010
Jan
2009
Jan
2008
Jan
2007
Jan
200