22 February 2019

Update

UK economy slows amidst heightened Brexit uncertainty

The ONS’ preliminary estimate for GDP growth in Q4 2018 confirmed that the UK economy slowed following a summer of relatively robust economic expansion. This coincided with the Bank of England releasing a downgraded growth forecast for the UK, with both heightened Brexit uncertainty and softer global growth weighing on the UK’s outlook.

UK economy slows amidst heightened Brexit uncertainty

The ONS’ preliminary estimate of GDP for Q4 2018 reported that the economy shifted down into a slower pace of growth towards the end of the year. GDP growth in Q4 came in at 0.2%, following a robust pace of expansion in Q3 (0.6%), which meant that overall GDP growth for 2018 (1.4%) was the weakest since the financial crisis as highlighted by the latest CBI forecast. The easing in growth in Q4 2018 was partly due to the fading of temporary factors that supported economic activity in Q3, including the warm summer weather and World Cup. Indeed, household consumption growth remained tepid in Q4 (despite the recent uptick in real pay growth) and business investment fell for the fourth quarter in a row. Recent surveys suggest that household spending and business investment are being held back by Brexit uncertainty, which has negatively impacted business and consumer confidence.

The subdued Q4 2018 GDP growth figure was in line with the December CBI Growth Indicator, which showed little economic momentum in late 2018 – the data also showed continually weak momentum in early 2019. Additionally, the easing in growth towards the end of 2018 chimed with the CBI’s December forecast, which expects the UK economy to return to its recent trend of subdued growth (following the temporary summer boost in Q3), in the event of a smooth transition to a new Brexit deal.

“Super Thursday” (in early February) saw the Bank of England’s Monetary Policy Committee (MPC) vote unanimously (9-0) to maintain rates at 0.75%, in line with consensus expectations. Notably, the MPC’s forecast for UK GDP growth was downgraded in the near term due to greater Brexit uncertainty and softer global economic activity. The Bank also expect lower inflation in the near-term due to the recent fall in global oil prices, although the medium-term outlook for inflation was largely unchanged (due to firming domestic cost pressures, as a recovery in economic growth further ahead exceeds weak supply growth).

The MPC’s current guidance on the future path of rate rises remains unchanged in the case of a “smooth” Brexit: i.e. an ongoing tightening in monetary policy will be necessary to return inflation to target, assuming that the economy continues to evolve in line with the MPC’s forecast. In the event of a “no deal” Brexit, the MPC have previously stated that they would either increase or decrease interest rates depending on how Brexit affects the economy (specifically, on the balance of how much demand hit is affected relative to supply potential).

Despite the slowdown in the UK economy and ongoing Brexit uncertainty, the UK labour market remained remarkably tight in the three months to December 2018. Employment continued to grow strongly, while the unemployment rate remained at among its lowest levels since the mid-1970s. The tightness in the labour market seems to be pushing up wages, with real regular pay (i.e. excluding bonuses and adjusted for CPI inflation) increasing by 1.2% in the year to December (on the less volatile three-month rolling basis). This is the strongest growth in real pay in almost two years; however, it is still weak compared with pre-financial crisis norms.

UK CPI inflation continued to slow in January 2019 to 1.8% (from 2.1% in December), the weakest rate since January 2017 and slightly lower than consensus forecasts (of 1.9%). The fall in January was largely driven by Ofgem’s cap on utility bills coming into effect. Underlying price pressures appear to be stickier, with core CPI (which strips out volatile components such as energy and fuel) holding steady at 1.9%.

For more information please contact Martin.Sartorius@cbi.org.uk