Brexit-related uncertainty has lifted, setting the stage for a rebound in investment spending. Already, we’re hearing news of banks getting in on the action – even when it comes to SMEs. Rising real wage growth is also paving the way for consumer recovery.
According to Capital Economics research, “this should allow GDP growth to quicken from a miserly 1.3% in 2018 to about 2% in 2019 and 2020”.
However, this may be a brief respite. The cheery prediction made by Capital Economics? It’s, as senior UK economist Ruth Gregory says, based on three factors.
The first is the belief that the strong growth we’re seeing now is based on shaky foundations.
Gregory explained at the end of October: “We are getting a clearer idea of how GDP growth in the third quarter shaped up. And so far, it is looking like it will be a pretty good number. But we doubt the recent improvement will last.
“Indeed, a number of temporary factors have boosted activity and there is little sign that the fundamental drivers of growth have improved much.”
Much of the summer boost came down to the World Cup and warm weather – both of which have ended. So it seems likely the nation will go back to its prior state.
“A bounce in high-street spending and ‘catch-up’ growth in the construction sector only boosted activity,” she said. They also masked the fact that the drivers of the UK economy haven’t changed by much.
What may also break this positive stage is inflation. As the Bank of England Andy Haldane said in an October speech, “there are signs of a new dawn breaking in pay growth.”
But with inflation on the up again, “the improvements in households’ spending power have been small though,” Gregory said.
That leaves us to discuss the third factor bought up by Capital Economics. We’re still nowhere closer to knowing what prime minister Theresa May has in store for us.
“On its own, uncertainty over the deal has led to less business investment since the referendum — and it will probably get worse before it gets better,” she said. “More importantly, our predictions for GDP growth are based on the assumption of a ‘soft’ Brexit.”
Capital Economics isn’t the only company to maintain that a hard deal or no deal could see the UK economy suffer.
In fact, Standard & Poor’s made clear that failure to secure a deal could trigger a recession.
It too had brought into question what impact inflation would have, especially when combined with a slump in property prices.
S&P even suggested that certain financial institutions “already reached the point of no return, and have started to trigger aspects of their contingency plans – such as cross-border legal entity mergers and the establishment of additional licensed entities.”
Of course, chancellor Philip Hammond claimed his Budget would end austerity and support whatever Brexit deal – or lack thereof – we come away with.
We’ll see if the tools he gave us will survive the Brexit storm.
Share this story