The UK’s slowing economy: facing headwinds

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest reports on UK data:

  • In the context of a weakening global economy and continuing Brexit uncertainty, UK GDP rose by a slightly weaker than expected 0.3% (QOQ) in 2019Q3, to be just 1.0% higher YOY.
  • NIESR is projecting 0.2% (QOQ) GDP growth for 2019Q4. If GDP does rise by 0.2% in 2019Q4, then GDP will grow by 1.3% in the year 2019, compared with 1.4% in 2018 and 1.9% in 2016 and 2017.
  • The data so far available for 2019Q4 have been disappointing. Retail sales slipped 0.1% (MOM) in October, whilst the Markit surveys for the month were subdued.
  • There is some softening in the labour market, though it is still fairly robust. Employment fell in 2019Q3 and vacancies, though still very high, are easing. Given the modest contraction in the labour force, unemployment also fell in 2019Q3 and the unemployment rate fell to 3.8%; it has not been lower since early 1975.
  • The annual increase in average earnings slipped to 3.6% in 2019Q3 for both total and regular pay. But, given the modest inflationary pressures, real earnings continue to grow quite well.
  • CPI inflation fell to 1.5%, below the Bank of England’s 2% target, in October reflecting lower energy prices. Producer prices inflation also eased in October, reflecting lower oil prices, and remains well-contained.
  • House price inflation was unchanged at 1.3% (YOY) in September, with prices falling in East England by 0.2% (YOY) and in London by 0.4% (YOY).

Concerning other economic news:

  • The Bank’s MPC left monetary policy unchanged at it November meeting but, whilst seven members of the MPC vote for no change, two members voted to cut rates to 0.5%.
  • Eurostat confirmed that Eurozone GDP had grown by 0.2% (QOQ) in 2019Q3, to be 1.2% higher YOY. Germany narrowly avoided recession, growing by 0.1% (QOQ) in 2019Q3 after a fall of 0.2% in 2019Q2 (revised). Its growth is effectively stagnant, as is Italy’s. French GDP rose by 0.3%, supported by fiscal expansion.

Concerning political developments:

  • Parliament was dissolved on 6 November 2019, 25 working days before the General Election of 12 December 2019, and the political parties have launched their campaigns.
  • The Chancellor announced changes to his fiscal rules, which could see an extra £100bn of net investment over the next five years.
  • The Shadow Chancellor announced a proposed £150bn Social Transformation Fund over five years (averaging £30bn a year). In addition, the previously announced £250bn Green Transformation Fund over ten years averages at £25bn a year. Taken together they could add £55bn a year of extra investment spending.

Ruth Lea said, “…the slowdown in the UK economy should be seen within the context of the weaker global economy, especially the Eurozone. In addition, the economy continues to face the headwind of continued Brexit uncertainty, which is almost certainly depressing investment and could well be undermining the consumer as well. But the economy is still growing. Moreover, despite the assertions that the economy has been significantly damaged by the direct impact of the June 2016 Brexit vote, which should be considered separately from the uncertainties generated by this year’s delays, the UK economy has performed quite creditably since the referendum. Between 2016Q2 and 2019Q3 it grew by 4.95%, the same as Germany and faster than Italy. Granted France and Spain have grown quicker but, given their higher margins of spare capacity as measured by unemployment rates, this is not altogether surprising,”

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

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