GDP set to underperform in 2019Q2, following Brexit preparations boost in 2019Q1
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest data on the UK economy:
- GDP partly recovered in May, rising 0.3% (MOM), after April’s 0.4% fall, reflecting a recovery in car production.
- April’s data were negatively affected by a drop in car production as firms shut plants down around 29 March (the original Brexit date). There was also anecdotal evidence of a “correction” to the higher stock-building and early deliveries businesses undertook prior to 29 March, which would depress the April figure.
- NIESR expect GDP to slip 0.1% (QOQ) in 2019Q2, following growth of 0.5% in 2019Q1, before rising 0.2% in 2019Q3.
- Retail sales rose a firm 1.0% (MOM) in June, but following falls in April and May. They grew 0.7% (QOQ) in 2019Q2, following a rise of 1.6% the three months to May.
- The trade (goods and services) figures improved in May, mainly reflecting lower goods imports.
- The labour market remains robust, though employment growth is slowing. The unemployment rate was 3.8% in the three months to May, the lowest since 1974Q4. Vacancies, though easing, are still very strong.
- Partly reflecting the tighter labour market, annual earnings growth is accelerating. In the three months to May, total earnings were 3.4% (YOY) and regular earnings were 3.6% (YOY) higher.
- Inflationary pressures seem well contained. CPI inflation was unchanged at 2.0% (YOY) in June.
- PPI (output) inflation fell to 1.6% (YOY) in June, whilst PPI (input) inflation fell to minus3% (YOY). Both benefited from the YOY fall in crude oil prices, which could be reversed if tensions in the Gulf escalate.
- The official measure of house prices inflation slipped to 1.2% (YOY) in May, but there were wide variations across the UK. In Wales, for example, they were 3.0% (YOY) higher, but in London they were 4.4% (YOY) lower.
- Public sector net borrowing was a disappointing £7.2bn in June 2019, compared with just £3.3bn in June 2018. The PSNB for the first three months of FY2019 was £4.5bn higher (YOY) than the first three months of FY2018. The OBR forecast a PSNB for FY2019 of £29.3bn (compared with the £23.5bn outturn in FY2018); it looks set to be overshot. Public sector net debt was 83.1% of GDP at end-June 2019.
Concerning Central Bank Watch, the latest Commission forecast:
- The MPC’s next monetary policy decision is due on 1 August. No change in policy expected.
- The ECB’s next monetary policy announcement is due on 25 July. No change in policy expected.
- The Fed’s next monetary policy announcement is due after the 30-31 July meeting. A 0.25% cut in Fed funds to 2.00-2.25% is expected, reversing last December’s increase.
- The European Commission recently released its July interim forecast. There were few changes. The Eurozone is expected to grow by 1.2% in 2019 (unchanged from May) and by 1.4% in 2020 (1.5% in May).
Concerning UK politics, Brexit:
- The new Conservative Party leader, to be announced on 23 July, is expected to become the new PM on 24 July. The Commons rises for the summer recess on 25 July.
- The OBR published its “July 2019 Fiscal risks report (FRR)” on 18 July. Aside from Brexit, they warned that “policy risks to the public finances…look greater than they were two years ago.”
- On Brexit, the OBR conducted a “no deal stress test” for the public finances, based on the IMF’s April 2019 “no deal” economic forecast. If “no deal”, the OBR projected GDP growth of 0.9% in 2019 (1.2% in the OBR’s March forecast baseline), minus4% in 2020 (plus 1.4% in March) and 0.8% in 2021 (1.6% in 2021), but growth would be higher in 2022 and 2023. Moreover, the “no deal scenario” “…adds around £30bn a year to borrowing from FY2020 onwards and around 12% of GDP to net debt by FY2023”, compared with the OBR’s March forecast baseline.
Ruth Lea said, “there is little doubt the economy in 2019Q1 was given a boost from preparations businesses made prior to 29 March, the original Brexit Day. Inevitably, April’s figure was negatively affected as businesses “corrected” for their earlier Brexit preparations. May’s partial recovery was encouraging. However, it look very likely that GDP will slip a tad in 2019Q2. But growth should resume is 2019Q3, driven by household consumption, underpinned by a robust labour market and rising real earnings.”