6 minute read 27 Jan 2020
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UK economy: A bit more clarity – but still many unknowns

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 27 Jan 2020

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EY ITEM Club’s Winter Forecast finds the UK economy set to benefit from reduced near-term uncertainties but UK–EU issues remain a threat

The outlook for the UK economy has improved over the last three months, with the decisive nature of the General Election result and the resulting clarity on the first stage of Brexit expected to provide a short-term boost to economic activity. The EY ITEM Club’s Winter Forecast has increased its projection for GDP growth to 1.2% in 2020 and 1.7% in 2021, compared to the 1% and 1.5% predicted in its last quarterly previous forecast.

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A bit less uncertainty...

I have been very keen to point out at every opportunity how difficult it has been to forecast the UK economy for the last three years because of the uncertainty over the outcome of the Brexit process. As we now know that the UK will leave the European Union (EU) on 31 January, things should get easier. In theory, yes, but there remain many unknowns.

Firstly, many of the details of the UK’s future relationship with the EU are still to be negotiated and therefore, there remains significant uncertainty around the shape of key issues such as future trade deals, immigration and regulation – all of which are very important for businesses and consumers.

Secondly, there is also a lack of clarity on the specifics of policy, on both domestic issues and future external relations. Brexit has occupied so much of the policy-making bandwidth that critical areas – such as healthcare, social care, investment in infrastructure, skills and education, and geographic rebalancing – have all not received the attention they merit. How policy will evolve in these areas is unclear to a significant extent, making the landscape difficult for businesses to navigate.

... and a bit more growth …

Just as there has been a slight increase in certainty, so there has been a slight uptick in the economic outlook. The EY ITEM Club believes that the decisive nature of the General Election result, and the resulting clarity on the first stage of Brexit, will provide a slight boost to economic activity compared to their Autumn forecast. The strong performance of the labour market in terms of new jobs – although less so in pay growth – suggests there may be more momentum than previously thought, and it appears the global slowdown may be bottoming out. Reflecting these factors, EY ITEM Club’s projection is for GDP growth of 1.2% in 2020 and 1.7% in 2021, compared to 1% and 1.5% in the previous forecast. 

GDP growth in 2020

1.2%

The expansion EY ITEM Club expects in 2020

... but hold the party poppers.

While a reduction in uncertainty is welcomed, there is a long way to go. In the last decade, the UK economy grew at the slowest pace of any decade since the Second World War with almost no increase in real wages. With the direction of the global economy uncertain – as disputes over trade weigh on growth and investment, together with concerns from many economists that the future Brexit settlement may act as a drag on UK expansion – business is unlikely to receive much support from the macro environment.

Consumer spending growth has slowed and the problems on the high street are well known. It is not clear what is driving consumer behaviour. Real wages and incomes have grown over the last year, employment has been steady and now appears to be growing again, and consumer confidence has not fallen significantly. We know that consumer indebtedness remains high by historic standards, and it may be that the general uncertainty has finally started to change consumer behaviour. This is an area to keep a close eye on in the coming months.

There may be some improvements in the economy, but it’s not time to pop the champagne yet. While we have some clarity, there are still significant unknowns – about the trade deal around Brexit, and the wider policy agenda of Government.

Over to you, Chancellor …

As a result of the Chancellor’s September statement, there is already a reasonable level of fiscal support in the forecast. All the signs are that this will be increased in the Budget on 11 March, as the Government seeks to demonstrate it is delivering on the promises made during the election campaign.  The Chancellor needs to create the platform to encourage businesses to invest and consumers to spend responsibly.

Towns have emerged as a key policy area, primarily because they are seen as the likely political battleground for the future. I am pleased that EY’s work with the Centre For Towns has helped to increase the focus on this critical area. There is no doubt that we need to do more to level up the country, and improve the geographic balance of economic activity, but there are no easy solutions to an issue that has political, social and economic dimensions. The Budget is the perfect opportunity for the Chancellor to provide more detail on the Government’s plans.

… as business starts to consider the long term.

Significant uncertainty may still exist, but we can be certain that change is coming. The UK is leaving the EU, the new Government has talked of an ambitious programme, the global policy consensus is under real pressure, and demographics, technology and the climate emergency will all impact the economy in the coming years. These factors may come together in new ways: concerns over the climate may lead to further reductions in trade, and support for localism that boosts towns may be possible through deploying technology in new ways. The economic outlook is challenging and now is the time for businesses to think creatively about their long-term strategy and plans to deliver it.

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Mark Gregory, UK Chief Economist, examines the findings of the EY ITEM Club Winter Forecast

Mark Gregory, UK Chief Economist, discusses the findings of the EY ITEM Club Global Economic Outlook 2020

Summary

  • UK GDP growth forecast increased to 1.2% for 2020, up from 1.0% three months ago
  • Businesses are expected to unleash some investment this year, but it is unlikely to be a major surge
  • EY ITEM Club urges caution on interest rates due to healthier near-term economy and fiscal stimulus expected in the Budget
  • Consumer spending growth projected to improve from 1.2% in 2019 to 1.4% in 2020, as real household disposable incomes rises by 1.8% in 2020
  • House prices predicted to rise by around 2.8% over 2020

 

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.