UK economy should be able to weather continued ‘Brexit uncertainty’ without too much damage, says ICAEW
Friday 14 June 2019, ‘Brexit uncertainty’, although weighing on both business and consumer sentiment, may not damage the UK economy as much as expected according to ICAEW. In its latest Economic Forecast, ICAEW believes that the economy should be able to bear the burden of continued uncertainty and highlights the role consumers, businesses and policy makers have had in insulating the economy from political uncertainty in the past.
The UK economy continues to enjoy some positives with pay growth continuing to outstrip inflation, unemployment forecast to remain very low and fiscal austerity being relaxed. Overall, the 2019 growth forecast is expected to increase from 1.3% to 1.5%.
But while heightened and ongoing political uncertainty presents a risk to this outlook, it need not be too damaging to the overall economy. After the EU referendum in 2016, many expected a recession to follow. But in practice, GDP growth accelerated afterwards with the slowdown in 2017 and 2018 more modest than some forecasters predicted. In addition, while growth in real consumer spending in recent years has been depressed by higher inflation, growth in cash terms has been steady. An effective response from the Bank of England, not least continued low interest rates, has and should continue to aid the economy while the Government has relaxed fiscal austerity via tax cuts and extra public spending.
Michael Izza, ICAEW Chief Executive, said: “There is no doubt that heightened Brexit-related uncertainty is weighing on business sentiment. Household and company spending and saving decisions are influenced by expectations of the future economic situation. But as long as a ‘no-deal’ Brexit is avoided, history suggests that the current ‘new normal’ of elevated uncertainty may not impact as much as some expect.
“Of course, cuts in investment by some businesses in response to uncertainty are unlikely to be reversed, even once the UK’s departure from the EU has been resolved. But if policymakers remain on the ball, the overall macroeconomic effect of the Brexit limbo businesses currently find themselves in should be manageable.”
- Faster growth in Q1 supported by ‘no-deal’ preparations. A 0.5% rise in GDP in Q1 was an improvement on the previous quarter’s sluggish 0.2% gain. However, a surge in manufacturing output suggests that the economy enjoyed temporary support from businesses stockpiling at the end of March. With an extension of the Brexit deadline to 31 October, an unwinding of the stockpiling effect suggests growth will have fallen back in Q2. The forecast has been upgraded to 1.5% from 1.3% three months ago. But given that ‘no-deal’, ‘deal’ or yet another Brexit extension all remain realistic possibilities, it makes forecasting uncertain at the moment.
- Business investment breaks a long-running fall. Having dropped in each quarter of 2018 (outside recessions, the longest continual decline since records began), business investment saw a surprise 0.5% rise in Q1 2019. However, the same ‘no-deal’ worries which encouraged stockpiling may also have played a role in temporarily raising business investment in the form of warehousing and logistics. The underlying trend is still negative though, dragged down by ongoing political uncertainty.
- Unemployment to remain low while pay growth stabilises. An unemployment rate of 3.8% in the first quarter of 2019 represented a near-45 year low, while the employment rate touched a joint-record high in the same period. The flexibility of the UK jobs market should support further jobs growth, but at a slower pace than recent years. However, the recent revival in pay growth appears to have reduced slightly to 3% year-on-year. This is expected to continue over the remainder of 2019.
- Uncertainty continues to hit investment. It is very clear that heightened Brexit-related uncertainty is weighing on business sentiment. However, outside business investment, the real economic impact of periods of elevated political uncertainty is hard to identify. Appropriate monetary policy by the UK Government should be able to reduce the drag on demand and the role of uncertainty as a “whipping boy” in economics should be dealt with caution in using it as a catch-all threat to the economy.
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Notes to Editors:
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About ICAEW Business Confidence Monitor™
4. The Business Confidence Monitor (BCM) survey began 2003.
5. 1,000 Chartered Accountants responded to a telephone survey between 21 January 2019 – 18 April 2019. . Businesses were categorised in terms of size (no. of employees), region and industry sector. Regional classification used was ONS Government Office Regions.
6. The BCM survey covers over 1% of economic activity both for the UK as a whole and for different UK regions. This assures our data captures accurately the mood of UK senior business professionals.
7. Business Confidence Index methodology – The Business Confidence Index is calculated from the responses to the following:
“Overall, how would you describe your confidence in the economic prospects facing your business over the next 12 months, compared to the previous 12 months?”
A score was applied to each response as shown below, and an average score calculated:
|Much more confident||+100|
|Slightly more confident||+50|
|Slightly less confident||-50|
|Much less confident||-100|
Using this method, a Confidence Index of +100 would indicate that all survey respondents were much more confident about future prospects, while -100 would indicate that all survey respondents were much less confident about future prospects.
8. Oxford Economics one of the world’s foremost advisory firms, providing analysis on 200 countries, 100 industries and 7,000 cities and local economies. Their analytical tools provide an unparalleled ability to forecast economic trends and their economic, social and business impact. Headquartered in Oxford, England, with regional centres in London, New York, and Singapore and offices around the world, they employ one of the world’s largest teams of macroeconomists and thought leadership specialists.
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