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Red Lighthouse in pink fog

Fog in Channel

Fog in Channel

Caught in the Brexit impasse, the UK economy is grinding to a halt. Are we waiting for Godot¹? My particular concern is that, in the meantime, business investment is lost. Without strong investment we will not see a meaningful rise in UK productivity and hence in future growth.

  1. Beckett, Samuel. Waiting for Godot: Tragicomedy in 2 Acts. New York: Grove Press, 1954

Executive summary

  • The lack of clarity around Brexit and the potential for a no-deal outcome is causing a high level of uncertainty for businesses. The uncertainty is having a paralysing effect on economic activity and planning in the first half of the year. Even assuming a favourable resolution that does not damage the UK’s trade links with the EU, the short term outlook is for weaker growth.
  • Headwinds from the global economy are likely to weigh on growth over the outlook period. Disappointing data in the eurozone, the waning stimulus in the US and a slowdown in China are making for a challenging global environment.
  • The short-term outlook is for widespread weakness across all sectors and regions. Surveys suggest that the construction sector as a whole and a full third of regional economies appear to be contracting. Assuming that a Brexit deal can be reached, the economy will expand at a rate of 1.2% in 2019.
  • The UK should then experience a modest recovery in the medium term with GDP growth for 2020 reaching 1.5%.
  • Business investment is bearing the brunt of Brexit jitters and slumped by 1.4% in the closing quarter of 2018 alone. Investment as a whole is expected to shrink by 0.2% in 2019 with businesses making the choice to delay their investment plans, waiting for clarity.
  • Housing remains a key driver of activity in construction with initiatives like Help-To-Buy fuelling demand from first time buyers. But overall the sales-to-stock ratio appears to be deteriorating, pointing to a loss of momentum in the housing market.
  • Manufacturing underwent a significant contraction in 2018. With concerns over Brexit, a slowdown in global growth and intensifying trade tensions haunting the world economy, the manufacturing sector is facing a mixed outlook.
  • Services were resilient through 2018, ending the year with a moderate 0.4% quarter-on-quarter growth. Buoyant domestic demand helped fill the gap from weaker service exports. Reports of decline in incoming work and employment in early 2019 show that the Brexit uncertainty is reaching activity in this sector.
  • Exports as a whole have continued to disappoint: revised data for 2018 show a lower boost from a weaker Sterling exchange rates in 2018. A weaker global economy will continue to hold back exports in our outlook.
  • The labour market remains tight, shown by a high number of unfilled vacancies. Yet surveys indicate that as the economy slows, firms’ demand for labour is showing signs of weakening.
  • The growth in real earnings continues to strengthen as businesses compete for scarce candidates. However, the lack of progress on productivity in the face of escalating wages is driving higher labour costs and raise a question mark over the sustainability of wage rises.
  • Consumption growth, though weak, is the main pillar supporting the economy and is expected to grow by 1.4% in 2019 and 2020. Low unemployment rates and resilient wage growth should help support consumer demand over the outlook period.
  • Latest inflation was at 1.9%, just below the 2% target level of the Bank of England, due to negative contributions from the introduction of OFGEM’s energy price cap in January and weaker global oil prices. This will be partly offset by the changes to the price cap planned for April, but inflation should stay at an average of 2.0% for 2019 and 2.2% in 2020. Stagnant productivity and rising wages will add up to rising domestic cost pressures in the medium term.
  • Weaker inflation and the uncertainty surrounding the Brexit process will see the Bank of England hold interest rates at the current 0.75% until at least November 2019 before another long pause.
  • Strong wage growth and moderating inflation should support retail sales to grow at 1.6% in 2019. Rising levels of internet penetration will continue to create challenging conditions for the UK’s High Street.
  • Regardless of the outcome of Brexit, the EU will continue to be one of the largest markets for the UK by virtue of its size and proximity. But the end agreement will have a significant impact on the UK’s role within ‘factory Europe’.

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