BofA cuts 2020 UK GDP forecast on prolonged Brexit uncertainty, US-China trade war

Economists at Bank of America-Merrill Lynch cut their forecasts for the rate of growth in Britain's economy for this year and next, predicting that the uncertainty around Brexit will last for longer and that the US-China trade war will escalate.

In a research note sent to clients, BofA-ML said it was now assuming that Brexit would remain unresolved by end-2020 and that the brinksmanship between Beijing and Washington would last at least until the end of June.

Because of the former, they no longer foresaw a so called "Brexit deal dividend" - or acceleration in growth into mid-2020 - although an "eventual" resolution of the US-China talks would allow a degree of recovery in economic growth during the following year.

UK GDP growth in 2020 was now seen half a percentage point lower, at 1.1%, but BofA-ML bumped-up its projection for 2019 from 1.1% to 1.4% on the back of the stronger-than-expected pace of expansion seen over the first three months of the year.

Despite the lower path now envisaged for GDP growth, the investment bank still expected Bank would go ahead and raise interest rates 2020, albeit in May and not in March as they had previously penciled-in.

"We see UK growth at or below our estimate of trend (1.25%) so we could justify no BoE rate hikes this year and next.

"However, UK trend growth seems so challenged that even our modest growth forecasts could tighten the labour market and elicit a hike. We assume the BoE hikes 25bp in May 2020 vs our previous forecast of February 2020."