Industry Forum’s Chief Economic Adviser, Andrew Smith, kicks-off the new year with his thoughts on the economic outlook for 2020.
UK Economic Outlook
The UK is performing badly. The economy has been slowing since 2017 and pretty much ground to a halt at the turn of the year, leaving growth over 2019 as a whole around only 1%. The good news for 2020 is that few economists expect much further deterioration; the bad news is few expect much of an improvement either.
While this poor performance is partly due to the effect on UK exports of a slowing world economy – reflecting escalating trade protectionism and tighter financial conditions – the collapse of business investment following the EU referendum is hardly coincidental. In the last 18 months, the proportion of companies citing Brexit uncertainty as an important factor affecting their business has risen sharply to more than half, and the performance gap between the UK and comparable economies has widened.
December’s general election has removed some of this uncertainty, notably there is now a government with a working majority ensuring the UK’s formal withdrawal from the EU. But the crucial questions remain unanswered. When will we actually part company? Will it be with or without a trade agreement and what sort? If maintained, the Prime Minister’s insistence that a deal must be struck by the end of this year will at best severely limit its scope, and at worst create new cliff-edge no-deal risk.
Amongst the more optimistic forecasters, the Bank of England assumes there will be “a smooth path” to “a deep free trade agreement with the EU”, but still sees only a gradual pickup with growth not returning to 2% until 2022, predicated on a rebound in business investment.
However, even those who doubt the smoothness of the path to, and depth of, any FTA are not – for now – forecasting outright recession either, given the resilience of the labour market. Record high employment and record low unemployment should see real earnings continue to recover (and finally return to their 2007 peak!), underpinning consumer spending (which accounts for two-thirds of total demand) and thus GDP growth – unless there is a major shock to confidence.
Of course, the flip side of strong jobs growth has been stagnating productivity as companies have preferred to employ more workers as demand has risen, rather than invest in (labour-saving) new capacity. But, with the economy now around full-employment and immigration likely to be politically constrained, we are rapidly running out of this particular road. If the UK is to return to anything like the long-term growth rate of 2-2½% pre-financial crisis – which accommodated rising living standards and public service improvements – a pre-requisite is the favourable resolution of this so-called “productivity puzzle”.
It is against this background that the March Budget will try to reconcile high expectations on the back of pre-election promises with the reality of a weak economy and limited room for manoeuvre under the government’s fiscal rules. Amongst competing priorities – “levelling up” the regions, social care, health, education, tax cuts and fiscal prudence – something has to give. No-one knows which way the Prime Minister will jump – and I suspect he doesn’t either.
Chief Economic Adviser, Industry Forum