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ICAEW downgrades economic forecast for 2019

Thursday 14 March 2019, Weak growth in the economy at the end of last year has provided a catalyst to frail growth in GDP in 2019, according to the latest ICAEW Economic Forecast. With momentum in the global economy slowing and Brexit in play domestically, the forecast has been downgraded to 1.3% from the 1.6% expected three months ago and in line with the OBR reports this week.

Regardless of the Brexit outcome, interest rates are also set to remain low in the next 12 months. With inflation below the Bank of England’s 2% base rate for the first time in two years, ICAEW predicts the Bank will struggle to raise rates even once this year. If pressure to support the economy becomes urgent, monetary policymakers could actually cut rates, as it did after the EU referendum in 2016, to 0.25%. 

Michael Izza, ICAEW Chief Executive, said:  “The latest forecast highlights the economic instability resulting from the current uncertainty. While parliament has rejected a no-deal outcome, what comes next remains unclear. Once a deal is reached, we can expect a significant uptick as business and consumer confidence increases. However, much damage has already been done as with businesses taking irreversible decisions to relocate assets and cancel planned investments.

“UK listed companies are in one of the most difficult reporting seasons in history.  Directors must disclose sensitivities around various scenarios, when so much still remains unknown, and factor this into their accounts. High quality financial reports have never been so important – or so challenging. Now more than ever, details around why certain judgments and assumptions have been made must be included with rigour and clarity. The numbers may change once we know more about the future UK-EU relationship, but keeping the market properly informed will avoid unexpected profit warnings, maintain investor confidence and help avert any Brexit shockwaves in the economy.”

  • A weak end to 2018 offers a poor launchpad for growth this year. GDP growth of 0.2% in Q4 was down from 0.6% in Q3 and the slowest since the bad weather-afflicted first three months of last year. Calendar-year growth in 2018 of 1.4% was the weakest since 2009. Brexit continues to present the key uncertainty for the economy this year. Under the assumption that the UK leaves the EU with a deal, the economy should benefit from a so-called Brexit dividend thanks to increased certainty, adding to the gains from lower inflation and looser fiscal policy. However, the weak starting point presented by Q4’s performance means downgraded 2019 GDP growth forecast to 1.3% from the 1.6% expected three months ago.
  • Companies’ willingness to invest continues to drop. Business investment reduced by 1.4% in Q4, the fourth consecutive quarterly fall, leaving spending in this area down 0.9% in 2018 overall. The ICAEW Business Confidence Monitor™ and other surveys suggest that Brexit and a related lack of clarity over the outlook have been a key driver of this weakness, so the forecast is very sensitive to whether a UK-EU deal is reached . Another fall in investment is expected, albeit at 0.3%, less poor than 2018’s contraction.
  • Low unemployment to continue, supporting current momentum in pay growth. The unemployment rate ended 2018 at 4%, the lowest in over 40 years. Job vacancies are at a record high, so unemployment should remain low. However, with the employment rate also unprecedented, jobs growth is forecast to slow to 0.5% this year from 1.2% in 2018. Meanwhile, annual pay growth ran at 2.9% in 2018, a 10-year peak. But with changes in the make-up of the workforce driving some of this improvement, 2019 is expected to deliver a similar rise in wages.
  • Regardless of Brexit outcome, interest rates set to remain low through 2019. CPI inflation dropped to 1.8% in January from 2.1% the previous month, taking inflation below the Bank’s 2% target for the first time in two years. Forces bearing down on inflation will continue to make their presence felt through 2019, implying that the Bank will struggle to raise rates even once this year.