- The economy stagnated in the fourth quarter of 2019 as it struggled in the face of particularly heightened domestic political and Brexit uncertainties. However, upward revisions to GDP earlier in the year meant that it grew 1.4% in 2019, which was up from 1.3% in 2018.
- 2019 was a real yo-yo year for the UK economy with its performance being particularly distorted by the two scheduled Brexit deadlines (28 March and 31 October). GDP grew 0.6% quarter-on-quarter in the first quarter, contracted 0.1% in the second (the first decline since the fourth quarter of 2012), grew 0.5% in the third quarter and was then flat in the fourth quarter.
- The economy saw decent growth in December itself as GDP rose 0.3% month-on-month with indications that it had a better second half of the month after the decisive General Election result diluted some of the uncertainties it faced. However, this only offset the 0.3% month-on-month GDP contraction suffered in November. Services output rose 0.3% month-on-month in December while manufacturing output also grew 0.3% and construction output expanded 0.4%
- On the output side of the economy, manufacturing contraction of 1.1% quarter-on-quarter weighed on GDP in the fourth quarter (industrial production contracted 0.8%). Services output only edged up 0.1% quarter-on-quarter while construction output grew 0.5% quarter-on-quarter.
- On the expenditure side, the economy was hampered in the fourth quarter by more cautious consumers and a renewed drop in business investment as companies were clearly in “wait and see” mode while waiting to see what would happen in the election and on the Brexit front. Consumer spending only edged up 0.1% quarter-on-quarter – the weakest performance for four years – while business investment fell 1.0% quarter-on-quarter (the biggest drop since the fourth quarter of 2016).
- The softness of consumer spending in the fourth quarter occurred despite still decent fundamentals as the ONS reported that compensation of employees rose 0.7% quarter-on-quarter and 3.5% year-on-year.
- There was also a sharp positive contribution from net trade (.6 percentage points) as exports surged 4.1% quarter-on-quarter while imports fell 0.8%. The ONS observed that “external evidence points to weaker export growth than shown in the official estimates”. In contrast, third quarter growth was held back by a sharp running down in inventories in the third quarter.
- 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 decisive December General Election and an easing of near-term Brexit uncertainties. 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.
- However, the economy may 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 could build if it looks unlikely 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 Government has ruled out any extension to the transition period beyond 31 December 2020.
- This is likely to cap the upside for business investment, and there may also be a limiting impact on both investment and exports from a still challenging global economic and trading environment. While there have been signs of stabilisation, the global economy is vulnerable to any shocks..
- The fundamentals for consumers should be relatively decent in 2020.
- Fiscal policy 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 in 2020, it will be most likely to cut interest rates. However, we expect the Bank of England to keep interest rates at 0.75% through 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:
“A preliminary estimate from the Office for National Statistics shows that the UK economy stagnated in the fourth quarter as GDP was flat quarter-on-quarter. This meant that GDP growth was 1.4% in 2019, slightly up from 1.3% in 2018, which had been the weakest performance since 2012.
“Fourth-quarter-stagnation continued the yo-yo performance of the UK economy through 2019 as activity was distorted by a number of factors, most notably the two scheduled Brexit deadlines. Clearly, the economy was held back in the fourth quarter by particularly heightened domestic political uncertainties as well as elevated Brexit uncertainties.
“Flat GDP in the fourth quarter of 2019 followed growth of 0.5% (revised up from 0.4% q/q) quarter-on-quarter in the third quarter, contraction of 0.2% (revised from 0.1%) in the second (the first decline since the fourth quarter of 2012) and growth of 0.6% in the first quarter.
“Year-on-year GDP growth slowed to 1.1% in the fourth quarter of 2019 from 1.2% in the third quarter.
“The economy saw decent growth in December itself as GDP rose 0.3% month-on-month with indications that it had a better second half of the month after the decisive General Election result diluted some of the uncertainties it faced. However, this only offset the 0.3% month-on-month GDP contraction suffered in November. GDP had earlier risen 0.2% month-on-month in October.
“Services output rose 0.3% month-on-month in December while manufacturing output also grew 0.3% and construction output expanded 0.4%
Consumers cautious in fourth quarter and business investment fell
“The fourth-quarter component breakdown of the expenditure side of the economy shows that consumers were cautious in their spending and reined it in, while business investment contracted again and significantly. There was a positive contribution (1.6 percentage points) from net trade. However, this was distorted by large movements in trade in non-monetary gold, which in turn weighed down on gross fixed capital formation which was negative.
“Specifically, consumer spending edged up just 0.1% quarter-on-quarter in the fourth quarter, which was the weakest performance for four years. This was despite the fact that consumers seemingly benefitted in the fourth quarter from reasonable fundamentals as the ONS reported that compensation of employees rose 0.7% quarter-on-quarter and 3.5% year-on-year.
“Disappointing but hardly surprising news – given major Brexit, UK domestic political and global economic uncertainties – saw business investment contract again in the fourth quarter and significantly (by 1.0% quarter-on-quarter) after rising over the previous three quarters (following upward revisions). Indeed, this was the sharpest drop in business investment since the fourth quarter of 2016. Even so, business investment was up 0.9% year-on-year in the fourth quarter.
“Overall investment fell 1.6% quarter-on-quarter in the fourth quarter and was down 0.9% year-on-year. In addition to the 1.0% drop in business investment, there was a decline of 0.5% in government investment. There was contraction of 3.9% quarter-on-quarter in private dwellings investment.
“Government spending jumped 2.2% quarter-on-quarter and was up 4.4% year-on-year.
“Net trade made a strong positive contribution of 1.6 percentage points to third quarter growth. Exports surged 4.2% quarter-on-quarter while imports fell 0.8%. However, this was distorted by large movements in trade in non-monetary gold.
Manufacturing contraction held back economy in fourth quarter
“On the output side of the economy, fourth-quarter GDP was held back by manufacturing contraction of 1.1% quarter-on-quarter as the sector extended its largely disappointing performance over the year. Overall industrial production contracted 0.8% quarter-on-quarter.
“Output in the dominant services sector edged up just 0.1% quarter-on-quarter in the fourth quarter. Output in the distribution, hotels and catering sector was particularly weak, contracting 0.4% quarter-on-quarter. Output in the business, services and finance sector rose 0.2% quarter-on-quarter.
“Construction output grew 0.5% quarter-on-quarter.
Economy has shown signs of picking up in first quarter of 2020
“Business and consumer confidence have clearly improved early on in the first quarter of 2020, and the overall impression is that this has led to some improvement in economic activity. However, with little hard data available so far, it is hard to judge just how much the economy is picking up and whether this can be sustained.
“Encouraging news has come from the purchasing managers’ surveys which reported that overall services and manufacturing output grew at the fastest rate for 16 months in January, with increased new orders and confidence boding well for future growth. There is also evidence that housing market activity has picked up. The quarterly January CBI industrial trends survey indicated a sharp pick-up in confidence and an upgrading of investment intentions.
“However, survey evidence from the BRC suggested that retail sales were lacklustre in January despite the pick-up in consumer confidence, while there was a marked drop in private car sales.”
