As we outline below, we think it is just a matter of timing. The political certainty created by the swift election of Theresa May plus the Bank of England’s interventions have delayed, rather than resolved, the underlying uncertainties caused by the vote. Chart 53: UK PMls tanked post-Brexit but have recovered Chart 54: While retail sales have remained strong 10 65 Oct retail Average 8 since 2010 60 6 4 55 2 0 ° sa ———= Composite PMI 2 4 Epp. % ami 4 Consumer confidence BAML est. of ——— GDP, % qoq, prelimina - Real consumption, %yoy confidence if 45 estimates (rhs) ; 6 Retail sales volumes. ex fuel,.% yoy inflation is i) Mar-10 Mar-11| Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 1984 1988 1992 1996 2000 2004 2008 20f2°*2o16 Source: BofA Merrill Lynch Global Research, Markit, ONS. Retail sales volumes. Source: BofA Merrill Lynch Global Research, GfK, ONS. 2017: Falling growth, negotiations and a consumer squeeze We think there are clear warning signs that conditions are deteriorating, uncertainty is set to return and a consumer squeeze is coming for the UK. Falling growth to compound deficit problems Real gdp is only expected to fall 0.1% in 2016 vs the March forecast. But the UK Office of Budgetary Responsibility expects growth to slip by 0.8% next year (2.2% to 1.4%) and 0.4% on 2018 (2.1% to 1.7%) vs March. A notable slice of this is can be attributed to the OBR’s estimate that Brexit added £59bn to UK borrowing to 2022, or nearly £200mn a week. These numbers include Phillip Hammond’s sensible but small measures. Our UK economist is more pessimistic forecasting 0.9% in 2017 and 0.7% in 2018. Even if we split the two, that represents a 50% decline in expected 2017 gdp and 40% decline in 2018. The OBR also expects public sector net debt to hit its highest level since 1964-65 in 2017-18 at a time when the UK already relies on “the kindness of strangers” to finance its growing twin deficit. 26 European Equity Strategy | O1 December 2016 orate 2 HOUSE_OVERSIGHT_014485