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.
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.
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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.
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.
