- Growth is seen slowing to an 11-year low of 1.0% in 2020 after likely expansion of 1.3% in 2019 (which would have been the lowest since 2009). We assume the economy will eke out 0.1% quarter-on-quarter expansion at best in the fourth quarter of 2019 and it could very well stagnate.
- The uncertainties facing the UK economy have been diluted by the Conservative’s decisive win in the General Election and the now inevitable UK exit from the EU on 31 January, but they have far from disappeared.
- Even with the UK leaving the EU with Johnson’s “deal”, Brexit uncertainties are likely to remain appreciable during 2020, reflecting concerns over the UK’s longer-term relationship with the EU, while there could be a renewed Brexit cliff edge late on in 2020 as the transition arrangement is only due to last until the end of the year. In addition, a difficult challenging global economic environment is likely to weigh down on the UK economy. Consequently, business investment is likely to remain limited and exports challenging.
- Meanwhile, although the fundamentals for consumers should still be relatively decent in 2020, we suspect they will not be as good as they were in 2019 with earnings growth modestly slower and the labour market softer. Consumers should benefit from ongoing moderate inflation.
- On the positive side, fiscal policy is set to be supportive to growth in 2020. The economy is also unlikely to be hampered by higher interest rates in 2020; indeed if the Bank of England does act on monetary policy in 2020, it now looks most likely to be to cut interest rates
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“We expect GDP growth to be limited to 1.3% in 2019, which would be the weakest performance since 2009 and down from 1.4% growth in 2018. The economy got off to a poor start to the fourth quarter amid a number of uncertainties (Brexit, domestic political, global economic) after stuttering in the latter part of the third quarter.
“We expect fourth-quarter GDP growth to be 0.1% quarter-on-quarter at best, and there is a very real possibility that the economy could stagnate in the fourth quarter. Certainly, the economy got off to a poor start to the fourth quarter as GDP was only flat month-on-month in October which reduced the year-on-year growth rate to 0.7%, the weakest since March 2012. Furthermore, the three-month/three-month growth rate was flat. The economy looks to have had a somewhat mixed November. The purchasing managers reported services, manufacturing and construction activity all contracted in November but there are signs (particularly from the BRC and Barclaycard) that retail sales picked up and were robust over Black Friday week. However, a critical factor will be how much strong Black Friday sales brought forward retail sales from December rather than increasing them.
Growth is seen slowing further to an 11-year low of just 1.0% in 2020.
“Even with a UK exit from the EU with Johnson’s deal by the end of January, Brexit uncertainties are likely to remain significant through 2020. There are likely to be concerns over the UK’s longer-term relationship with the EU, while there could be a renewed Brexit cliff edge late on in 2020 as the transition arrangement is only due to last until the end of the year.
“This is likely to limit any upside for business investment coming from a Brexit “deal”. In addition, we suspect that a difficult global economic and trading environment will also weigh down on business investment in 2020 as well as hampering UK exports.
“While the fundamentals for consumers should still be relatively decent in 2020, things probably got as good as they get for consumers in the third quarter of 2019. We suspect earnings growth will ease back from the 11-year high of 3.9% seen in the three months to July (it was 3.8% in the three months to August) while the labour market is expected to be softer in 2020.
“On the positive side for growth prospects in 2020, fiscal policy will be supportive to growth.
“Additionally, the economy is unlikely to be hampered by higher interest rates in 2020; indeed, if the Bank of England does act on monetary policy in 2020, it now looks most likely to be to cut interest rates from 0.75%. However, we currently lean towards the view that interest rates are most likely to stay at 0.75% through to 2021.”