Johnson will have to get lucky to avoid a weak UK performance
What is the outlook for the UK economy? Last year proved difficult for forecasters. Not the overall year, which was correctly anticipated by most as likely to be a pretty poor one, but the volatility—month-to-month and quarter-on-quarter.
That was the year of Brexit deadlines that came and went—29th March, 12th April, 31st October, then 31st January 2020. Businesses were perplexed. Those who could prepared for no deal—a number of times, often at big cost, investing a bit before the deadline and stockpiling, as well as raising production only to reverse the increase.
GDP fell in Q2. Car production slumped by 45 per cent year-on-year in April as auto companies shut down to cope with overproduction. Due to more factory shutdowns by Toyota, BMW and others, car production in November was 16.5 per cent down on the year before. Partly as a result, the latest GDP data just released for the month showed UK growth falling by 0.3 per cent. In the three months to November it grew by a depressingly low 0.1 per cent. Business investment declined or was stagnant for Q2, Q3 and Q4.
By late 2019, business confidence as measured by the CBI was stuck at the lowest levels since the referendum. And the latest Purchasing Managers’ Indexes still suggest weakness up to the end of last year. Not surprisingly, an increasing number of the Bank of England’s policymakers are already suggesting that a cut in interest rates may be what is needed to sustain the economy.
But the reaction to the decisive Tory victory in the election of 12th December will be looked at carefully before any decision is made to follow the European Central Bank, where the last gift of its departing president Mario Draghi was a renewed softening of monetary stance. The Bank of England’s rate-setters on 30th January, at Mark Carney’s last meeting, will want to see whether signs of some recovery in optimism—slightly better consumer confidence reported by CEBR/YouGov and a slight pick-up in house prices in some parts of the country—translate into higher growth overall, or were just one-offs.
The truth is that a major boost in public and private investment will be needed to reverse businesses’ concerns over the impact of Brexit, including those in the car industry. And although big firms, including the large financial institutions, are generally better able to spend the money necessary to cover them for what Brexit may bring, many small firms simply cannot.
And problems with some sectors already in difficulty are likely to persist—see the airline Flybe which needed rescuing, see the bloodbath in large parts of retail where the Centre for Retail Research expects another 170,000 job losses at least in the sector in 2020. It is not surprising therefore that the average expectation of most forecasters is for lacklustre growth of between 1 per cent and 1.5 per cent this year. And this despite likely giveaways in the budget of 11th March and what has been announced on current and capital government spending already.
But Boris Johnson may be lucky—again. The US is now signing the first phase of a trade pact with China, however limited, meaning that one of the main downward risks for world growth may be receding. But Brexit—and how negotiations over trade and movement of people develop over the next few months—are likely to continue to put a dampener on UK growth. Expect less volatility month-to-month through 2020, but there is no clarity yet as to whether the trend will be up, down or just disappointingly flat.
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