UK economic prospects after Brexit

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growth House price main scenario Brexit Economic Outlook July uk Economic Outlook project
<p>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
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