We differ from the OBR in our reading of the state of the UK and world economies. The Cebr view is pretty grisly at the moment, and we consider the latest OBR forecasts complacent. The world economy is slowing down and may yet go into recession next year. Monetary trends for the UK economy point to a domestic slowing down next year while our Brexit analysis suggests that much of the current apparent strength of the economy is pre-Brexit stockbuilding, with the prospect of a serious downturn in 2019 when this unwinds.

 

The weakest parts of the economy are exports and investment, both affected by Brexit. And it is likely that next year these will be even worse.

 

You would expect a Chancellor trying to keep the economy going and trying to make a success of Brexit to focus his Budget on trying to make the economy more competitive and on boosting exports and investment. He has done some of this but the bulk of his budget is made from higher levels of government consumption with additional spending on health, benefits and social care. These may look politically attractive but they do little to help the economy.

 

In the short term Brexit will be bad for the economy and just possibly awful. The other EU member states have their own problems with Italy and with immigration and seem to be playing hardball with the UK as a displacement activity. But they too will be hit by a seriously disruptive Brexit so we still assume that some deal can be patched together.

 

Economically the only sensible model for post-Brexit Britain is to become a Western version of Singapore. Former Singapore PM Lee Kuan Yew once told me that his aim was to make Singapore ‘the most highly skilled contract labour force in the world’. We need to do the same in the UK. This means focussing on skills, reforming the badly failing apprenticeship scheme, keeping business taxes down, providing investment allowances and improving infrastructure, particularly roads to the ports. The Chancellor at least did some sensible things in the budget – increasing spending on roads (hopefully especially those to and from ports) and other infrastructure, on science and skills and freezing fuel duty (where the UK tax remains one of the highest in the world).  The proposed digital services tax looks to make sense but the devil is in the detail for such taxes.

 

But he did nothing to change our view that even with a relatively benign Brexit deal, Britain is headed for a recession at some point next year, assuming a worsening global downturn. Hammond explicitly said that he was leaving headroom within his Budget targets in case the outlook changed. We are pretty certain he will need to use this…..

Contact: Douglas McWilliams dmcwilliams@cebr.com  Tel: 0207 324 2860