6 minute read 4 Nov 2019
busy street from above

Why preparing now will help companies ride the wave of upcoming uncertainty

By

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.

6 minute read 4 Nov 2019

Uncertainty has been the dominant theme of the EY ITEM Club forecasts over the three years since the Brexit referendum.

With the UK recently agreeing a withdrawal agreement with the European Union, hopes were raised that we might be about to move forward with more certainty. However, with the agreement yet to be passed by Parliament, the outlook remains unclear.

Expectations may have been running ahead of themselves in any case. The withdrawal agreement only covers the next 14 months, and, as it defines the terms of the UK’s exit, offers almost no additional guidance on the future of its trading and other relationships with the EU after 2020.

In so far as we can glean anything about likely conditions after 2020, the political declaration suggests a much less comprehensive relationship than currently, which, other things being equal, the majority of forecasters believe is likely to mean a slower UK GDP growth rate after 2020 compared to staying in the EU.

Growth in 2020

1.0%

The expansion EY ITEM Club expects in 2020

More of the same?

In truth therefore, little has changed in the short term and, as a consequence, the EY ITEM Club Autumn Forecast 2019 maintains the 2019 Summer Forecast’s GDP growth projection of 1.3% for 2019. More interestingly, the latest forecast markedly cuts expected expansion in 2020 to 1.0% from the 1.5% rate previously expected.

This reflects an assumption that the UK will leave the EU at the end of January, the fact that uncertainty has not been significantly reduced by the UK and EU agreeing a withdrawal agreement, and that the EY ITEM Club now believes that the lack of clarity over the future UK and EU relationship will limit any recovery in business investment in the immediate future more than previously thought.

Heightened Brexit, domestic political and global economic uncertainties are combining to create a very challenging environment.

Despite concerns over uncertainty, it is interesting to note that the economy performed largely as expected over the past three months following the path set out in the Summer Forecast 2019. GDP contracted 0.2% quarter-on-quarter (q/q) in Q2 2019, and it currently looks like expansion of 0.4% q/q occurred in Q3. However, this was buoyed by strong growth in July and largely weak news on the economy for August and September, indicating that heightened Brexit, domestic political and global economic uncertainties are combining to create a very challenging environment.

Consumers have been resilient in their spending habits so far, but the labour market is showing signs of weakening, which is likely to result in slower spending growth for the near term at least.
Howard Archer
Chief Economic Advisor to the EY ITEM Club

With no clear pattern …

Despite a relatively steady quarter, the economy remains difficult to understand because the individual components are likely to develop in different ways:

  • Consumers are benefitting from better fundamentals, but signs of softening in the labour market may add to the growing weakness in consumers’ confidence and limit any increases in spending.
  • The global economy is under pressure, with concerns over geopolitics and trade weighing on activity, and trade is unlikely to contribute much to UK growth.
  • On a positive note, fiscal policy will be more supportive than previously planned following Chancellor Sajid Javid’s announcement in the Spending Review for 2020/21 that public spending will rise 4.1% in real terms, the fastest increase in 15 years. It is also highly likely that the Budget for 2020/21 will contain further fiscal loosening measures.

Howard Archer, Chief Economic Advisor to the EY ITEM Club, says: “The situation for consumers has been as good as it’s going to get this year, with employment and earnings growth healthy and inflation remaining low. Heightened uncertainty could have a dampening impact on consumer spending, although consumers have been resilient in their spending habits so far. However, the labour market is showing signs of weakening, adding to a more negative picture for next year. This is likely to result in slower levels of spending growth for the near term at least.”

… plan for the worst …

There is no obvious boost to growth in sight and investment analyses will remain difficult in this environment, due to the lack of clarity on the UK and EU relationship after 2020. It is certainly possible that agreeing a future relationship will not be possible in 14 months and the UK will then either find itself without a deal or will extend the transition period.

Businesses should continue to plan for low growth and have contingencies around a possible future ‘no-deal’ scenario, while at the same time developing options for future investment that can be realised once more clarity emerges. The next 12 to 18 months are likely to be volatile, with the potential for sentiment to shift quickly in response to political developments.

… and look to the future

It is important not to let short-term concerns stop businesses from thinking long term.

Combine concerns over the climate emergency and its potential implications for business with the changes Brexit and technological change could bring to markets and supply chains, and it is clear that strategic thinking is required to identify the way forward in a dynamic economy. There will be winners and losers in this changing environment and companies need to do the work now to ensure they come out on the right side of the line.

Mark Gregory, Chief Economist, UK, says, “The outlook for business investment growth is pretty bleak, with a weaker global economic environment adding to corporate concerns over the UK outlook. A Brexit deal is only the first step in reducing uncertainty and may be offset by concerns over future growth with a divergent EU-UK relationship. The continuing low level of business investment could jeopardise the UK’s long-term growth prospects, regardless of the future relationship with the EU.”

Key findings

  • UK GDP growth forecast cut to 1.0% for 2020, down from the 1.5% predicted three months ago
  •  No Brexit dividend – business investment expected to contract by 1.3% in 2019 and remain flat in 2020
  • Interest rates likely to remain on hold until 2021 although a Bank of England rate cut in 2020 is a genuine possibility

For the full findings, download our report (pdf)

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Listen to our podcast: EY ITEM Club Autumn Forecast 2019 roundup
Mark Gregory, UK Chief Economist, examines the findings of the Autumn Forecast.

The continuing low level of business investment could jeopardise the UK’s long-term growth prospects, regardless of its future relationship with the EU.
Mark Gregory
EY UK Chief Economist

Summary

The UK economy is performing in line with expectations this year, but the outlook has deteriorated for 2020 according to the latest economic forecast from the EY ITEM Club, which has maintained its GDP growth projection of 1.3% for 2019 but cut its forecast for 2020 to 1.0% – down from the 1.5% predicted in July.

About this article

By

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.