He said: “By harming flows of trade, investment and labour between the UK and its biggest market the EU, Brexit could reduce UK trend growth to 1.8% from the pre-Brexit rate of 2.2%. In the case of a hard Brexit, trend growth could fall to 1.5%.”
“As a prime minister May would find it easier to play hard-ball with the EU if she increased her majority, we see that election outcome as potentially the most damaging for the UK’s long run economic outlook,” he said.
Pickering said despite the blow to medium-term confidence, a narrow majority win for May or Corbyn, or a hung parliament, would probably be the best outcome for the economy, eventually.
Where around two-thirds of MPs are pro-EU, most of these are outside the Conservative party so an election that created the need for a cross-party compromise would increase the chances of a softer Brexit strategy, which would be ‘a positive in the long run’ for the economy, he added.
Last week, Berenberg reduced its odds on a Tory election win to 65% from 80% previously.
The bank said: “Of the 65% probability we put on a Conservative win, we see a 35pt chance the Conservatives increase their majority from their current 17 seat majority in the House of Commons and a 30pt chance they win with a lower majority. We see a 25% chance of a hung parliament and a 10% chance of a Labour majority. That implies a 65% chance of an embarrassment for Theresa May who called the election just a few weeks ago on the back of a commanding 20 plus poll lead.”
Overall, UK demand is holding up well, with the improving international backdrop offsetting the normalisation in domestic demand after a surge in late 2016.
Downside risks to near-term demand from Brexit uncertainty and rising inflation have not yet materialised in any serious way and the UK is currently enjoying a broad-based expansion, said Pickering.
“Instead of cutting back spending as inflation picks up, households are digesting the inflation by spending more in order to target a desired level of real consumption. We continue to forecast robust growth of 1.8% in 2017 and 1.7% in 2018,” he said.