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June 14, 2019

UK economy to weather continued ‘Brexit uncertainty’, says ICAEW

‘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. 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%.

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 was 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.

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.

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.

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.Brexit remains a wildcard. The ICAEW thinks that another Article 50 extension is the most likely near-term outcome.

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