Press release

13 Jan 2020 London, GB

UK economy had poor November as uncertainties peaked

The economy suffered a very poor November as GDP contracted 0.3% month-on-month (the largest monthly drop since April), thereby reducing year-on-year growth to just 0.6%, the lowest since June 2012.

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  • The economy suffered a very poor November as GDP contracted 0.3% month-on-month (the largest monthly drop since April), thereby reducing year-on-year growth to just 0.6%, the lowest since June 2012. A poor performance in November was always on the cards, given that the uncertainties facing the economy were at a peak with the General Election looming and doubts over what would happen on the Brexit front after it had been delayed again from 31 October. It is clear that businesses were cautious in their behaviour while it also appears that consumers were reluctant to spend (although weak retail sales data for the month may have been distorted by Black Friday timing effects). 
  • The economy's poor November performance will likely fuel belief that the Bank of England could cut interest rates from 0.75% to 0.50% in the near-term – possibly as soon as on 30 January after the MPC’s first meeting of 2020. Two MPC members voted for a rate cut in December and other members have indicated that they could favour a near-term interest rate reduction if the economy does not quickly show improvement following the decisive General Election result.
  • However, while November's poor GDP data may fuel the inclination of some MPC members to vote for an interest rate cut, they are much more likely to be influenced in their decision by the initial information on the economy post-election that emerges. To that end, the “flash” manufacturing and services purchasing managers’ surveys that come out on 24 January could be highly influential as well as the January CBI industrial trends and distributive trades surveys. 
  • GDP fell 0.3% month-on-month in November as it was held back by a 1.7% plunge in manufacturing output and a 0.3% dip in services output. Construction output saw a rebound of 1.9% month-on-month after contracting 2.0% in October.
  • November’s poor performance was partly offset by upward revisions to GDP in October and September. GDP growth is now reported to have edged up 0.1% month-on-month in both months having previously been reported flat in October and down 0.1% in September. Consequently, GDP was up 0.1% in the three months to November compared to the three months to August.
  • There now looks to be a real chance that the economy contracted marginally over the fourth quarter of 2019; at best it may have stagnated. Barring further revisions to the back data, GDP will have needed to grow 0.3% month-on-month in December just for GDP to have been flat quarter-on-quarter over the fourth quarter.
  • In fact, the economy looks to have had a difficult December overall – although there are signs that confidence and activity got a lift after the decisive General Election result. The final purchasing managers’ survey indicated that there was some pick-up in services activity after the General Election result and there are also reports of improved consumer and business confidence. However, survey evidence suggests that retail sales were lacklustre over the month. 
  • If GDP was flat or contracted marginally over the fourth quarter, overall GDP growth will likely have been 1.3% in 2019, which would match the 2018 outturn which was the weakest performance since 2009. There is a chance GDP growth may have been just 1.2% in 2019.
  • We expect the economy to grow 1.2% in 2020. However, this is limited by the economy coming off the weak base at the end of 2019 and year-on-year growth is seen improving from just 0.9% in the fourth quarter of 2019 to 1.6% in the fourth quarter of 2020.
  • We expect the economy to get a lift in the early months of 2020 from a more settled domestic political environment following the Conservatives’ substantial win in December’s General Election and an easing of near-term Brexit uncertainties as the UK leaves the EU with Boris Johnson’s deal on 31 January. This is expected to lead to some businesses committing to projects and investments that had been delayed in the latter months of 2019. It may also give a modest lift to consumer willingness to spend, particularly on big-ticket items.
  • Fiscal policy also looks set to support growth in 2020, while the economy is unlikely to be hampered by higher interest rates.
  • Indeed, if the Bank of England does act any time soon, it will clearly be to cut interest rates. However, despite recent increased dovish comments by MPC members, we are far from convinced the Bank of England will cut interest rates as we do expect the economy to see a clear pick-up in activity early on this year. We just about hold on to the view that the Bank of England will keep interest rates at 0.75%.
  • However, we suspect that the economy will find it hard to kick on from the expected improvement in the early months of 2020 until it becomes clearer what will happen with the UK-EU relationship at the end of 2020, and the nature of the relationship thereafter. Indeed, Brexit uncertainties look highly likely to build up again as 2020 progresses should it look improbable that the UK and EU will agree a Free Trade Arrangement by the end of the year when the transition arrangement is due to end. The Conservatives have ruled out any extension to the transition period beyond 31 December 2020.
  • We expect GDP growth to improve to 1.7% in 2021. This is based on the assumption that the UK and EU either manage to achieve a bare bones Free Trade Agreement by the end of 2020 or the Government ultimately agrees to an extension to the transition arrangement, thereby avoiding trade between the UK and EU reverting to WTO rules from January 2021.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The economy had a very poor November as GDP fell 0.3% month-on-month. This was the largest month-on-month drop in GDP since April when the economy had been hit by de-stocking after the UK’s exit from the EU on 31 March was scrapped.

“November’s drop followed upwardly revised marginal growth of 0.1% month-on-month in both October and September (previously reported as flat and down 0.1% respectively).  

“Year-on-year growth in GDP slowed to just 0.6% in November, which was the weakest since June 2012; it was down from 1.0% in October, and 1.1% in both September and August, and 1.4% in July. It peaked at 2.4% in March and February.

“The underlying softness of the economy was highlighted by GDP edging up just 0.1% in the three months to November compared to the three months to August.

“The economy was undoubtedly hampered by heightened uncertainties magnifying business (especially) and consumer caution in November. Domestic political uncertainties were at a high ahead of the 12 December General Election, while the Brexit situation was unclear after the UK’s planned exit on 31 October failed to go ahead. Although the UK’s exit from the EU was delayed from 31 October to 31 January, an inconclusive General Election result could have further clouded what would happen on the Brexit front.  

Sharp manufacturing contraction held back economy

GDP growth in November was held back by manufacturing output contracting 1.7% month-on-month and 2.0% year-on-year. Manufacturing output likely suffered in November from a correction after there had been some build up in stocks by clients ahead of the UK’s planned exit from the EU on 31 October, which was of course delayed.

“Services output fell 0.3% month-on-month in November, which limited year-on-year growth to 0.8%. There were indications that domestic political and Brexit uncertainties, as well as concerns over the domestic economy, weighed on demand for business services. It was also reported that consumers have shown signs of caution over spending on more expensive services items.

“Meanwhile, construction output grew 1.9% month-on-month in November, but this only offset the 2.0% month-on-month contraction seen in October; construction output was up 2.0% year-on-year.

“Some encouraging news saw the UK record a trade surplus of £4.0 billion in November as exports rose 1.1% month-on-month and imports plunged 7.8%. However, this was distorted by large exports of non-monetary gold. 

Economy seems to have had difficult December despite signs of improvement after election result

“The economy will have needed to record GDP growth of 0.3% month-on-month just for a flat performance over the fourth quarter of 2019.

“It looks unlikely that the economy’s performance in the fourth quarter of 2019 will be bailed out by a markedly improved performance in December – although there are signs that the decisive General Election result did provide a lift to services activity in the second half of the month (according to the purchasing managers’ survey) and also gave a lift to business and consumer confidence.

“Nevertheless, the purchasing managers still indicated that services activity as only flat over December as a whole while manufacturing and construction activity were both reported to have contracted. However, it needs to be noted that the purchasing managers’ surveys can tend to overstate weakness at times of heightened uncertainties. Meanwhile, survey evidence from the British Retail Consortium pointed to lacklustre retail sales over December and November combined (to take account of Black Friday distortions).

Growth outlook

“We expect the economy to grow 1.2% over 2020. However, this is limited by the economy coming off the weak base at the end of 2019 and year-on-year growth is seen improving from just 0.9% in the fourth quarter of 2019 to 1.6% in the fourth quarter of 2020.

“We expect the economy to get a lift in the early months of 2020 from a more settled domestic political environment following the Conservatives’ substantial win in December’s General Election and an easing of near-term Brexit uncertainties as the UK leaves the EU with Boris Johnson’s deal on 31 January. This is expected to lead some businesses committing to projects and investments that had been delayed in the latter months of 2019. It may also give a modest lift to consumer willingness to spend, particularly on big-ticket items.

“It is also very possible that fiscal policy will be more expansionary in 2020/21 than we had previously expected due to the Conservative Party looking to cement support in the traditionally Labour seats it gained in the General Election. Certainly, the Conservatives will look to boost investment in infrastructure in the traditionally Labour regions in the Budget on 11 March, pledging to “level up” economic performance in struggling towns in the Budget’s national infrastructure strategy. This is on top of the 4.1% increase in real terms in government spending in 2020/21 that was announced in last September’s Spending Review.

“However, we suspect that the economy will find it hard to kick on from the expected improvement in the early months of 2020 until it becomes clearer what will happen with the UK-EU relationship at the end of 2020 and the nature of the relationship thereafter. Indeed, Brexit uncertainties look highly likely to build up again as 2020 progresses should it look improbable that the UK and EU will agree a Free Trade Arrangement by the end of the year when the transition arrangement is due to end. The Conservatives have ruled out any extension to the transition period beyond 31 December 2020.

“This is likely to cap the upside for business investment, as there may also be a dampening impact on both investment and exports from a likely still challenging global economic and trading environment. While there are currently signs of stabilisation, the global economy remains vulnerable to any shocks.

“We also suspect that while the fundamentals for consumers will remain relatively decent in 2020, they will likely be affected by earnings growth being below the highs seen in mid-2019 together with slower employment gains.

“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, then start to rise very gradually.

“We expect GDP growth to improve to 1.7% in 2021. This is based on the assumption that the UK and EU either manage to achieve a bare bones Free Trade Agreement by the end of 2020 or the Government ultimately agrees to an extension to the transition arrangement, thereby avoiding trade between the UK and EU reverting to WTO rules from January 2021.”