_DEAL OR NO DEAL? James Roberts looks at the impact of Brexit on the UK economy
Recent months have seen a run of chaotic political news for the UK that have had analysts searching the economic statistics for signs of a knock-on impact. Markets famously hate uncertainty, and Brexit has delivered this for Britain in spade loads. However, during this period, the Office for National Statistics has delivered a run of figures that are mixed in tone, but certainly not in line with the political chaos.
Employment levels are at their highest since 1971, and rising, while the unemployment rate is at its lowest since 1975, at 4.0% in December 2018. This is well below the 5.0% mark, which many economists refer to as “full employment”, and consequently pay is rising in real terms.
Inflation has moderated in recent months, with the CPI figure at 1.8% in January 2019 moving below the Bank of England’s target of 2.0%. Falling inflation can sometimes indicate a slowing economy, and certainly business investment is weak at present. However, lower inflation also reduces the likelihood of an interest rate hike.
Global slowdown
The latest GDP figures could be seen as more consistent with a narrative of a negative Brexit impact. Growth slowed to 0.2% in Q4 2018 on a quarter-on-quarter comparison, although this coincided with a deceleration for the global economy. Indicators from China to the US indicate a worldwide loss of momentum. Indeed Italy moved into recession in Q4 2018, while Germany saw its GDP flatline. While Britain may have slowed in Q4, it was certainly not a country that stood out as being particularly troubled in a global context.
Interestingly, the UK figures do not point to an across-the-board slowdown. The manufacturing sector was contracting in Q4, but in complete contrast the professions were surging. This is of huge significance when assessing the prospects of the UK regional city centres in 2019, whose offices today are more likely to contain a law firm or global accountancy practice than the HQ of a manufacturer.
Our forecast
Our forecast is for UK GDP growth in 2019 of 1.5%, which is similar to the level the country saw in 2018; assuming the country avoids a ‘no deal’ Brexit. The major regional office centres recorded solid levels of take-up in 2018, and our forecast would be sufficient to guarantee more of the same. The UK is in the midst of a digital revolution that will benefit from the roll out of 5G telecoms in 2019/2020, and the regional cities are claiming their share of the tech action.
However, the forecast turns on a ‘no deal’ being avoided. Opinions on whether that will happen vary widely from one politician or pundit to the next. No one knows what the final outcome will be, however, even ERG MPs speak of the House of Commons’ in-built anti-hard Brexit majority.
Summer spurt
We believe that Q1 2019 will see slow GDP growth, reflecting the global economic slowdown, and lower business investment due to Brexit. If the government concludes a deal in March, this would clear the way for a stabilisation in Q2, then stronger growth in the summer months. The reality of no deal having been avoided, and a roadmap appearing towards a future trading relation with the EU, should give more firms the confidence to plan for the future and invest. This would boost the corporate side of the economy, as low inflation and rising wages allow the consumer to spend more. Consequently, we believe the UK could enjoy a summer spurt for growth.
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For more information, please contact James Roberts, james.roberts@knightfrank.com.