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Macro Watch: muted start to UK economy in 2019

Oliver Kolodseike, Senior Economist, Colliers International, explains:

“The UK economy was off to an uninspiring start to the year. Business survey data suggested that the economy came to a standstill and political uncertainty continued to dominate the media. There was better news from the ONS. Retail sales volumes increased surprisingly strongly on the back of discounting as inflation moderated.  Wage growth also continued to outstrip inflation by a growing margin, supporting a modest recovery in consumer demand. Nonetheless, economic forecasts for this year remain subdued.  The UK may struggle to match 2018’s growth of 1.4%.”

“Revised investment volume data points to a strong end to 2018, with December’s figure of £8.5bn highlighting the best month since mid-2015. It may be too early to comment on 2019, but preliminary figures suggest that the UK is down on 2018 volumes, but pre-Brexit Day activity levels are promising.  Despite fears of redemption pressure after negative outflows in December, UK institutions are net buyers so far.”

The ‘no deal’ Brexit harbinger which looms over the economy grows ever more real. It is not clear what would be the best means to support the UK economy in the event of a no deal: stimulate demand or boost supply?

The answer depends on which part of the economy is damaged most, according to Capital Economics, which adds thatpolicymakers would face three problems:

  • identifying the greater problem of the likely shocks to both supply and demand;
  • responding to the timing of those shocks, as they would be different (demand, near-term; supply, delayed); and
  • responding to the unfolding economic challenges without being able to identify what is happening in real-time.

Paul Dales, Chief UK Economist at Capital Economics explains:

“Given all this, to avoid doing the wrong thing it may seem that policymakers should do nothing!  Our view is that as the decline in demand would last longer than the reduction in supply, the initial policy response to a ‘no deal’ Brexit should focus on stimulating demand. And when policymakers are unsure in the first few weeks and months, it makes sense to lean towards looser policy rather tighter policy.

“At a time when the reputations of policymakers will be on the line and after they have persistently warned about the perils of a ‘no deal’ Brexit, it would be very brave for them to do nothing or even tighten policy.

“That’s why if there is a no deal Brexit, we expect the Bank of England to cut interest rates from 0.75% to 0.25% and the Chancellor to implement a discretionary loosening in fiscal policy worth about 0.5% of GDP.”