Our scenario for Brexit
Forecasting is never easy considering the assumptions to make and the scenarios to create, and if possible this time was even more difficult.We are currently forecasting 2018 and 2019 which is the year when the UK is set to leave the European Union. At this moment we still don’t have clarity about the future and what will be the final outcome of the current UK-EU negotiations. In the scenario used for these forecasts, a March 2019 cliff edge will be avoided and a transition period will last at least until the end of 2020. Clarity on the Brexit process will arise by the end of 2018. This may change in the next months and we are ready to review our assumptions if reality differs from what we are currently thinking.
Modest growth with consumers not splashing money
Compared to what we said in January, we have revised up our estimates for 2018 pencilling in GDP growth of 1.5%. However a lot of this is due to the revisions ONS published for 2016 and that affected 2017 growth as we have discussed in one of our previous blog.
About 2019, we expect GDP to continue its growth with a moderate pace expanding more towards the end of 2019 thanks to clarity on the Brexit process.
The main demand driver, private consumption, which accounts for more than 60% of the UK economy, will contribute less than usual in 2018 with an expansion expected to be lower than 1%. This will be the result of the real wages contraction experienced in most of 2017, a saving ratio close to its historical minimum, and consumer confidence in negative territory.
Linked to the next point we expect consumption to get slightly better growing by 1.1% in 2019.
Wages picking up after a fight between opposite direction forces
After a disappointing year for real wages, we expect nominal salaries to pick up by 2.7% this year and 2.5% next year. Considering that inflation will slowly move towards the 2% BoE target, this would mean a pick-up in real terms in 2018 and 2019. We expect CPI to reach 2% by the end of 2018 and averaging 1.8% in 2019.
Inflation was the main force pushing nominal wages up, but not the only one. Skill shortages, low unemployment, a significant slowdown in net migration, and the National Living wage were also contributing to the upward pressure. On the downward side the major factors are Brexit uncertainty and an extremely weak productivity performance.
Investment to pick up only in 2019
Even if order books are full and capacity utilization is slightly over its long-term trend, we think that uncertainty surrounding the Brexit process will convince companies to hold on their investment plans in 2018. We expect these to pick up in 2019 over more clarity on the future EU deal which in our scenario will happen by the end of 2018. Transforming these considerations into numbers, we expect business investment to rise 0.5% in 2018 and 1.3% in the following year.
The global economy is still expanding but risks are around the corner
In 2017, only 12 countries out of 200 have reported a contraction – compared to 36 in 2012 and 94 in 2009 (IMF data).
In the next two years expectations are for an even faster growth peaking in 2018 and continuing the expansion in 2019.
After several years of sluggish growth, the Eurozone is finally seen not as a drag but as a positive contributor to global economy. Moreover, the current expansion is considered more solid since it is driven by domestic demand compared with a past where it was relying mostly on exports. Forecasts expect the Eurozone to have peaked in 2017 but to continue its growth in the next years
On the other side of the Atlantic, the US is set to continue its healthy expansion and to reach the peak of its economic cycle in 2018. As with the Eurozone, a big contribution to growth is coming from business investment and an extremely solid job market. However the data show that consumer spending is running much faster than real disposable income. Some concerns are also coming from the major fiscal reform approved by the Trump’s administration which may actually over-heat an economy already running at full speed.
As said we will be more than ready to change our mind and adjust our forecasts if reality will show us a different picture.
Well…this may start from tomorrow, with the Spring Statement. Stay tuned!