UK economy hampered as Brexit fog continues to swirl

As you were ...

At the risk of sounding like a broken record, the outlook for the UK economy remains incredibly difficult to forecast in the latest EY ITEM Club Spring Forecast. The UK did not leave the EU on 29 March as planned and the exact date of departure now is still unclear as politicians return from the Easter recess. As a result, we are trying to understand how much of the performance of the UK economy is being influenced by Brexit-related uncertainty. The disappointing level of business investment seems likely to be due to the lack of clarity on the future UK–EU relationship but, by contrast, some of the growth in UK GDP in the first three months of 2019 may be due to business and consumer stockpiling as a precaution against a no-deal Brexit.

However, Brexit is not the only factor making forecasting the UK economy difficult. In the first quarter of 2018, we experienced ‘the Beast from the East’ and this together with Easter falling much later in 2019 than 2018 makes year-on-year comparisons difficult.

... with little sign of faster overall growth ...

Drawing the data together and assuming the UK now leaves the EU on 31 October, the EY ITEM Club expects the UK economy to grow at 1.3 % in 2019, down from the forecast 1.5% growth in its 2019 Winter forecast. A later exit from the EU means a slower acceleration in activity as uncertainty persists for longer through 2019 and business investment remains subdued. This effect carries over into 2020 with growth of 1.5% forecast compared to the 1.7% in the 2019 Winter forecast.

... but with differences appearing beneath the surface ...

The real challenge though is not the level of growth, disappointing as it is (the slowest since 2009), but in understanding the implications of significant levels of variations in activity across different sectors of the economy. Business investment fell in 2018 and continued on this disappointing path in the first quarter of 2019. The outlook for the global economy has also worsened and the UK’s trade performance has been hit. Yet, EY’s latest Global Capital Confidence Barometer, a survey of over 2,000 executives worldwide, identifies the UK as the leading destination for M&A over the next 12 months.

And there are more positive signs. UK consumers have upped their spending in the first quarter of 2019 with strong retail sales growth as real earnings continue to rise and the labour market remains buoyant. Following on from the Budget in the autumn and then the Spring Statement, government spending is also providing a boost to economic activity.

The more data we analyse, the more difficult it becomes to form a consistent view of the economy. As the EY ITEM Club points out, while business investment has been falling, companies have nevertheless indicated they are investing in automation and artificial intelligence, although this may be showing up in current not capital spend. This approach seems likely to reduce employment and yet job growth continues and has recently been dominated by the creation of relatively more full-time positions, rather than the temporary hires we might expect given the uncertainty and the move to introduce labour-saving technology. 

... creating the need for vigilance and flexibility.

In this uncertain and difficult to analyse economy, businesses should:

– Continue to prepare for a no-deal Brexit as this remains a possible outcome with all the risk this could entail

– Invest time and resources to tracking the market, with a particular focus on the regular updates on employment numbers, pay and inflation, as these provide the best warning signs of how businesses and consumers are faring

– Develop options that support rapid responses, such as a quick increase in investment or production, if uncertainty is removed or consumers continue to prove more resilient than we currently expect

– Continue to build and test strategies against longer-term scenarios based around Brexit outcomes, changes in global trade, technological change and demographic developments

– Not ignore the threats and opportunities from M&A but consider these in the context of the full landscape of capital deployment