Economy heads into 2020 with very little momentum - Capital Economics
UK Economics

Economy heads into 2020 with very little momentum

UK Economics Weekly
Written by Ruth Gregory

The economy seems to be heading into 2020 with very little momentum. And we do not have high hopes for next year. Indeed, whatever the Brexit drama delivers in 2020, it seems likely that uncertainty will continue to hold back GDP growth. At least a slight easing in uncertainty and a fiscal stimulus should generate some improvement in the quarterly rate of GDP growth next year. That will lay the foundations for a rise in the annual rate of growth from 1.0% in 2020 to 1.8% in 2021.

If the markets (and ourselves!) had any thoughts of winding down in the run-up to Christmas they didn’t last long as there were important enough events this week for the pound to have its worst week of the year. The fall from $1.35 to $1.30 was not an early present for anyone going overseas for Christmas. Admittedly, the Q3 Quarterly National Accounts provided a rare piece of positive news, with the ONS revising up quarterly GDP growth in Q3 from 0.3% to 0.4%. But this was driven by a larger boost from net trade than in the previous figures, which we know has already started to unwind. (See here.) The timelier data, such as December’s Flash PMIs, suggest that the economy flat lined in Q4. (See here.)

Elsewhere, November’s inflation figures confirmed that CPI inflation remained well below the 2% target. (See here.) Earnings growth softened too, with annual pay growth excluding bonuses falling from 3.6% in September to 3.2% in October. (See here.) So the economy is heading into 2020 with very little momentum.

Taking all of this together, it was no surprise that the Monetary Policy Committee’s (MPC) decision this week to keep interest rates on hold at 0.75% was split, with Jonathan Haskel and Michael Saunders voting to cut interest rates immediately for a second consecutive meeting. (See here.)

In the event, the crucial factor in persuading the MPC not to cut rates was to allow greater time to assess whether Brexit uncertainty is fading. At least with a Brexit deal by 31st January now more or less guaranteed, there should be some reduction in uncertainty. The Withdrawal Agreement is likely to pass its second reading in Parliament this afternoon (voting expected at 2.30pm) and finish its passage through Parliament in the second week of January.

But even if the Withdrawal Agreement is agreed by 31st January, we doubt that this will unleash a tidal wave of business investment that leads to much faster GDP growth, higher interest rates and a much bigger rise in the pound in 2020. After all, the most crucial decisions about the UK’s future trading relationship with Europe are still to come. And Boris Johnson’s decision this week to enshrine into law a clause preventing the government from extending the status-quo transition period beyond 2020 keeps alive the possibility of the UK and the EU trading on WTO terms after December 2020.

Of course, it wasn’t that long ago that Johnson said he would rather “die in a ditch” than delay Brexit beyond 31st October and we all know how that turned out. So for the time being we are assuming that the transition period will be extended at the last minute in some form or another beyond 31st December. But by that point the damage will have been done and the lingering uncertainty will have kept some business investment on ice. (See here.)

All in all, we do not have high hopes for 2020, with Brexit uncertainty set to continue to limit growth. But a slight easing in uncertainty and a fiscal stimulus should prompt some rise in the quarterly rate of GDP growth next year. That will lay the foundations for a rise in the annual rate of growth from 1.0% in 2020 to 1.8% in 2021. Our five key calls for 2020 are here and for other economies, see our “Key Themes” section of our website.

Accordingly, there may still be plenty to worry the MPC. Granted, it is all change at the Bank of England, with the incoming Governor, Andrew Bailey, due to take the helm on 16th March. But it is very rare for new Governors to alter the dial on monetary policy on day one. (See here.) We are sticking with our forecast that rates will remain on hold throughout 2020. But if it becomes clear that the economy isn’t improving, we doubt the MPC will hang about. Rates are more likely to end 2020 lower than 0.75% rather than higher.

The fortnight ahead

Capital Economics is closed for the holidays from 25th December and will reopen on 2nd January. When we get back, we’ll get a clearer idea of how the year finished up, with the release of December’s final IHS Markit/CIPS reports. We wish all our readers a Merry Christmas and a Happy New Year.


Economic Diary & Forecasts

Upcoming Events & Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Consensus*

CE Forecasts*

UK Data Response

25th – 1st

Capital Economics London Office Closed

23rd–30th

No Significant Data Released

Selected future data releases and events

Thu 2nd

UK

IHS Markit/CIPS Manufacturing PMI (Dec, Final)

(09.30)

Fri 3rd

UK

BRC Shop Price Index (Dec)

(09.30)

UK

IHS Markit/CIPS Construction PMI (Dec)

(09.30)

UK

Net Consumer Credit (Nov)

(09.30)

UK

Mortgage Approvals (Nov)

(09.30)

UK

M4 Money Supply (Nov)

(09.30)

Also expected during this period:

28th – 3rd

UK

Nationwide House Prices (Dec)

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts**

%q/q(%y/y) unless stated

Latest

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

2019

2020

2021

GDP

+0.4(+1.1)

+0.0(+0.8)

+0.2(+0.4)

+0.4(+1.0)

+0.5(+1.1)

+0.6(+1.7)

(+1.3)

(+1.0)

(+1.8)

Household spending

+0.3(+1.1)

+0.2(+1.1)

+0.4(+1.3)

+0.5(+1.4)

+0.5(+1.7)

+0.4(+1.9)

(+1.2)

(+1.6)

(+1.6)

CPI inflation (%)

(+1.5) (Nov)

(+1.5)

(+1.9)

(+1.4)

(+1.4)

(+1.6)

(+1.8)

(+1.6)

(+1.7)

ILO unemployment rate (%)

3.8 (Oct)

3.9

3.9

3.9

3.9

3.9

3.9

3.9

3.8

Bank rate, end period (%)

0.75

0.75

0.75

0.75

0.75

0.75

0.75

0.75

1.00

10 yr gilt, end period (%)

0.81

0.81

0.81

0.88

0.94

1.00

0.75

1.00

1.25

$/£, end period

1.30

1.30

1.35

1.35

1.35

1.35

1.35

1.35

1.40

Euro/£, end period

1.18

1.18

1.24

1.26

1.27

1.29

1.23

1.29

1.33

Sources: Capital Economics, Refinitiv

** Based on a scenario in which a Brexit deal is struck on 31st January 2020. For more see our UK Economics Update “Our key forecasts for 2020” 19th December 2019.


Ruth Gregory, Senior UK Economist, +44 20 7811 3913, ruth.gregory@capitaleconomics.com