Two small forecast tweaks - Capital Economics
UK Economics

Two small forecast tweaks

UK Economics Update
Written by Paul Dales
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This Update clarifies the tweaks to our forecasts for the economy and the financial markets triggered by the delay to Brexit to 31st January and the recent changes to our forecasts for the global financial markets. Although the numbers are slightly different, the story remains the same.

  • This Update clarifies the tweaks to our forecasts for the economy and the financial markets triggered by the delay to Brexit to 31st January and the recent changes to our forecasts for the global financial markets. Although the numbers are slightly different, the story remains the same.
  • Our three sets of forecasts for the economy and financial markets based on different Brexit outcomes (deal, no deal and repeated delays) mean that we don’t need to start from scratch every time something changes with Brexit. Indeed, the delay to Brexit from 31st October 2019 to 31st January 2020 was already built into our “repeated delay” scenario. Our full suite of forecasts in this scenario are shown in Table 1.
  • But the delay does mean our forecasts in the deal and no deal scenario require a bit of housekeeping. The stories are still the same. If there were a Brexit deal, we think that a fall in uncertainty would allow business investment to rebound that, together with a fiscal stimulus, would result in GDP growth accelerating from about 1% now to just above 2% in 2021. (See here.) And if there were a no deal, we suspect the economy would fall into a recession lasting two quarters with a peak-to-trough decline in GDP of about 1%, but that GDP growth would rebound to just below 2% in 2021. (See here.)
  • The only change is that those trends now begin three months later than previously. That means the annual growth rates for 2019, 2020 and 2021 are now a bit different. The end-year forecasts for Bank Rate are mostly the same, although the modest hikes after a deal and the swift cuts after a no deal happen three months later than before. All these new forecasts are shown in Tables 2 & 3 and in Chart 1.
  • Obviously, the general election on 12th December will go a long way to determining what happens with Brexit. For what it is worth, we think there is something like a 35% chance of a deal on 31st January, a 15% chance of a no deal, a 45% chance of a further delay and a 5% chance of remain. (See here and our downloadable Election & Brexit Simulator, which allows clients to generate their own Brexit probabilities.)
  • The biggest change stems from some alterations to our forecasts for global bond yields. We no longer expect 10-year US Treasury yields to rise from 1.84% now to 2.50% by the end of 2020 and to 2.75% by the end of 2021 or US equity prices to fall sharply this year. Instead, we now think that 10-year Treasury will stay close to 2.0% for the next two years and that the S&P 500 will do nothing more than move sideways. (See our Global Markets OutlookRoad ahead still looks bumpy for equities”, 31st October.)
  • As the upward influence on UK gilt yields from global factors has diminished and the downward influence on UK equity prices from overseas has disappeared, we have revised down our gilt yield forecasts and revised up our FTSE 100 forecasts. In our deal scenario, we now think that 10-year gilt yields would rise to 1.50% by the end of 2021 rather than to 2.00% previously. And in our repeated delays scenario, we think yields would stay around 0.75% rather than climb to 1.25%. (See Chart 2.) In all three scenarios, we now expect the FTSE 100 to stay close to its current level of around 7,300.
  • Overall, we are still a bit more upbeat than the consensus if there were a Brexit deal, but a bit more downbeat if there were more delays. In our view, more delays would lead to interest rates being cut.

Chart 1: GDP in Different Brexit Outcomes (%y/y)

Chart 2: 10-Year Gilt Yield (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Key Forecasts Tables

Table 1: Brexit Repeated Delays Scenario*

2019

2020

Annual (% y/y)

Q1

Q2f

Q3f

Q4f

Q1f

Q2f

Q3f

Q4f

Average 2010-17

2018

2019f

2020f

2021f

Demand (% q/q)

GDP

0.6

-0.2

0.4

0.2

0.3

0.3

0.3

0.3

2.0

1.4

1.3

1.0

1.5

Consumer Spending

0.3

0.4

0.3

0.4

0.4

0.4

0.4

0.4

2.2

1.6

1.2

1.5

1.6

Government Consumption

0.8

1.1

0.4

0.8

1.1

0.7

0.6

0.7

0.9

0.6

3.5

3.2

2.2

Fixed Investment

0.9

-0.9

-0.1

-0.2

0.3

0.6

0.7

0.6

2.9

-0.1

0.1

1.0

2.0

Business Investment

0.8

-0.4

-0.5

-0.5

0.2

0.0

0.0

0.0

4.3

-1.6

-1.2

-0.5

0.0

Stockbuilding1 (contribution, ppts)

0.9

-1.2

0.1

-0.1

0.0

0.0

0.0

0.0

0.1

0.2

0.4

-0.3

0.0

Domestic Demand2

1.3

-0.9

0.3

0.3

0.5

0.5

0.5

0.5

2.2

1.3

1.8

1.3

1.7

Exports

1.6

-6.6

3.8

0.0

0.0

0.1

0.0

0.2

3.6

-0.9

-0.3

0.3

2.0

Imports

10.3

-13.0

3.4

0.2

0.5

0.8

0.8

0.7

4.0

0.7

3.9

-0.1

2.7

Net Trade2 (contribution, ppts)

-0.8

0.7

0.0

-0.1

-0.2

-0.2

-0.2

-0.2

-0.2

-0.4

-0.8

-0.3

-0.3

Labour Market (% y/y)

 

 

Unemployment (ILO measure, %)

3.8

3.9

3.9

3.9

3.9

3.9

3.9

3.9

6.6

4.1

3.9

3.9

3.9

Employment

1.1

1.3

1.3

0.9

0.8

0.6

0.6

0.6

1.2

1.2

1.2

0.6

0.5

Productivity (output per hour)

-0.1

-0.4

0.1

-0.1

0.4

0.6

0.5

0.6

0.5

0.6

-0.1

0.5

1.0

Income & Saving (%y/y)

 

 

Nominal Average Weekly Earnings3

3.3

3.9

3.9

4.0

3.9

3.4

3.3

3.2

1.9

2.9

3.7

3.5

3.3

Real Average Weekly Earnings4

1.5

1.5

1.9

2.3

1.9

1.8

1.6

1.5

-0.4

0.3

1.8

1.7

1.6

Real Household Disposable Income

2.2

2.2

2.0

1.3

1.2

1.5

0.9

1.4

1.7

2.7

1.9

1.3

1.3

Saving Ratio (%)

6.4

6.8

6.3

6.7

6.5

7.2

6.5

7.2

9.3

6.1

6.5

7.0

7.0

Prices (% y/y)

CPI

1.8

2.0

1.9

1.6

2.0

1.6

1.6

1.7

2.3

2.5

1.8

1.7

1.7

Core CPI5

1.9

1.8

1.7

1.8

1.9

2.0

2.0

1.9

2.1

2.1

1.8

2.0

1.8

CPIH

1.8

1.9

1.8

1.6

1.9

1.7

1.7

1.9

2.1

2.3

1.8

1.8

1.9

RPI

2.5

3.0

2.6

2.3

2.5

1.9

1.8

1.9

3.1

3.3

2.6

2.0

2.2

RPIX

2.4

2.9

2.6

2.4

2.6

2.2

2.2

2.4

3.2

3.4

2.6

2.4

2.4

Nationwide House Prices (end period)

0.7

0.5

0.2

0.9

0.8

1.0

1.3

1.5

3.4

0.5

1.0

1.5

2.0

Monetary Indicators (end period)

 

 

Bank Rate (%)

0.75

0.75

0.75

0.75

0.75

0.50

0.50

0.50

0.46

0.75

0.75

0.50

0.50

10-Year Gilt Yield (%)

1.00

0.83

0.49

0.75

0.75

0.75

0.75

0.75

0.45

1.28

0.75

0.75

0.75

Sterling Trade-weighted Index

80.0

77.0

76.9

77.7

77.8

77.9

78.0

78.1

82.8

77.0

77.7

78.1

77.7

$/£

1.32

1.27

1.23

1.25

1.25

1.25

1.25

1.25

1.52

1.28

1.25

1.25

1.25

Euro/£

1.17

1.12

1.13

1.14

1.14

1.14

1.14

1.14

1.21

1.11

1.14

1.14

1.14

Current Account & Public Finances

 

 

Current Account (£bn)

-31

-21

-26

-24

-25

-28

-30

-29

-73

-92

-102

-113

-121

% of GDP

-6.0

-4.6

-4.8

-4.3

-4.5

-5.0

-5.3

-5.0

-3.9

-4.3

-4.6

-4.9

-5.0

PSNB6 (£bn, financial year)

98

40

55

56

62

% of GDP (financial year)

5.6

1.9

2.5

2.5

2.6

Global (% y/y)

 

 

World GDP7(CE estimate for China)

3.0

2.9

3.0

2.9

2.8

2.7

2.7

2.8

3.6

3.6

2.9

2.7

3.0

Oil Price (Brent, $pb, end period)

68

67

61

60

60

62

66

70

83

54

60

70

72

Sources: Refinitiv, Capital Economics; 1Excluding alignment adjustment; 2Excluding valuables; 3Including bonuses; 4Earnings deflated by CPI; 5Excluding energy, food, alcohol & tobacco; 6Excluding Banking groups; 7PPP terms

* Based on our “repeated delay” scenario for Brexit, which assumes that Brexit is delayed again and again at least until the end of 2021.

Key Forecasts Tables (continued)

Table 2: Brexit Deal Scenario*

2019

2020

Annual (% y/y)

Q1

Q2f

Q3f

Q4f

Q1f

Q2f

Q3f

Q4f

Average

2010-17

2018

2019f

2020f

2021f

Demand (% q/q)

GDP

0.6

-0.2

0.4

0.2

0.4

0.4

0.4

0.6

2.0

1.4

1.3

1.3

2.2

Consumer Spending

0.3

0.4

0.3

0.4

0.4

0.5

0.5

0.5

2.2

1.6

1.2

1.7

1.9

Fixed Investment

0.9

-0.9

-0.1

-0.2

0.5

0.8

0.9

1.5

2.9

-0.1

0.2

1.7

5.0

Net Trade1 (contribution, ppts)

-0.8

0.7

0.0

-0.1

-0.2

-0.2

-0.2

-0.2

-0.2

-0.4

-0.8

-0.3

-0.3

CPI (% y/y)

1.9

2.0

1.8

1.6

2.0

1.7

1.8

2.1

2.3

2.5

1.8

1.9

2.0

Unemployment (ILO measure, %)

3.8

3.8

3.9

3.9

3.9

3.9

3.9

3.8

6.6

4.1

3.9

3.9

3.8

Average Weekly Earnings2 (% y/y)

3.3

3.9

4.0

4.0

3.9

3.4

3.4

3.6

1.9

2.9

3.7

3.6

3.5

Bank Rate (%, end period)

0.75

0.75

0.75

0.75

0.75

0.75

0.75

1.00

0.46

0.75

0.75

1.00

1.50

10-Year Gilt Yield (%, end period)

1.00

0.83

0.51

0.75

0.81

0.88

0.94

1.00

0.45

1.28

0.75

1.00

1.50

£/$ (end-period)

1.32

1.27

1.25

1.25

1.28

1.30

1.33

1.35

1.52

1.28

1.25

1.35

1.40

Sources: Refinitiv, Capital Economics; 1 Excluding valuables; 2 Nominal, Including bonuses

* Assumes a Brexit deal is struck on 31st January 2020.

Table 3: Brexit No Deal Scenario*

2019

2020

Annual (% y/y)

Q1

Q2f

Q3f

Q4f

Q1f

Q2f

Q3f

Q4f

Average

2010-17

2018

2019f

2020f

2021f

Demand (% q/q)

GDP

0.6

-0.2

0.4

0.2

-0.5

-0.5

0.5

0.5

2.0

1.4

1.3

-0.2

1.8

Consumer Spending

0.3

0.4

0.3

0.4

-0.4

0.0

0.2

0.4

2.2

1.6

1.2

0.3

1.5

Fixed Investment

0.9

-0.9

-0.1

-0.2

-1.5

-1.9

0.8

0.3

2.9

-0.1

0.1

-2.9

1.6

Net Trade1 (contribution, ppts)

-0.8

0.7

0.0

-0.1

0.1

0.1

-0.1

-0.1

-0.2

-0.4

-0.8

0.2

-0.2

CPI (% y/y)

1.9

2.0

1.8

1.6

2.1

1.9

2.2

2.6

2.3

2.5

1.8

2.2

2.3

Unemployment (ILO measure, %)

3.8

3.9

3.9

3.9

3.9

4.2

4.3

4.3

6.6

4.1

3.9

4.2

4.1

Average Weekly Earnings2 (% y/y)

3.3

3.9

4.0

3.9

3.6

3.0

3.0

3.0

1.9

2.9

3.7

3.2

3.4

Bank Rate (%, end period)

0.75

0.75

0.75

0.75

0.50

0.25

0.25

0.25

0.46

0.75

0.75

0.25

0.50

10-Year Gilt Yield (%, end period)

1.00

0.83

0.51

0.75

0.25

0.25

0.25

0.25

0.45

1.28

0.75

0.25

0.75

£/$ (end-period)

1.32

1.27

1.23

1.25

1.15

1.15

1.15

1.15

1.52

1.28

1.25

1.15

1.25

Sources: Refinitiv, Capital Economics; 1 Excluding valuables; 2 Nominal, Including bonuses

* Assumes the UK leaves the EU without a trade deal on 31st January 2020.


Paul Dales, Chief UK Economist, +44 20 7808 4992, paul.dales@capitaleconomics.com