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Brexit watch: CBRE downgrades economic outlook for UK as Chancellor readies £17 billion no-deal response

Chancellor Sajid Javid is preparing a “significant economic policy response” to the tune of an additional £16.6 billion of financial support to businesses affected by the disruption caused by a potential no-deal Brexit including £4.3 billion in 2019/20.

Policies under consideration include a temporary corporation tax holiday, cuts to national insurance contributions, as well as direct support for sectors affected by EU trade disruption, including food and farming.

The passing of the March deadline for leaving the EU and the extension of Article 50 has been reflected in considerable volatility in official output data

Stockpiling in advance of the expected Brexit deadline led to reasonable growth in Q1 but manufacturing output growth plunged by 4.1% in April – and was largely responsible for dragging down overall GDP growth by 0.3%, according to CBRE.

The services PMI index, for example, has indicated little growth all year while the construction and manufacturing PMIs are now well into negative territory. This could indicate a few difficult months ahead, suggests CBRE. The labour market, by contrast, has been much more stable with steady growth in employment recorded through 2019 so far, and the unemployment rate is down to 3.8%

Retail sales are doing very well, growing by 3.4% in Q2 2019 compared to the same quarter a year ago and at an annualised rate of 4.4% so far this year. Even allowing for increased e-commerce sales, store-based retail sales have grown at an annualised rate of 2.8%. This counterintuitive positive trend likely masks a reality of struggling retailers and maintaining sales volumes by steep discounting which will be weighing down margins.

Capital Economics suggests that the use of CVAs by store retailers may have peaked – citing nine store retailer CVAs over the year to Q2, compared to 12 in the year to 2018 Q3. However, the picture presented by Capital Economics is nuanced.

Amy Wood, Property Economist, at Capital Economics wrote:

“Given that CVAs lower the overall market rent and that those retailers who have been subject to a CVA are still at risk of insolvency, we think that retail rental values have further to fall.”

Capital Economics’ forecast that retail rental values will fall by 7% over the next two years, compared to the median consensus expectation of a 5.8% cumulative fall over this same period.

james.wallace@realassetmedia.com