UK economic growth tepid, while global economic outlook deteriorates

This week the IMF released data showing continued concerns about the outlook for the global economy, amid faster-than-expected slowdowns in the Eurozone and emerging markets.

The latest IMF World Economic Outlook Update noted that the outlook for the global economy in the near term had weakened as risks to the downside loomed larger. The IMF’s forecasts for global growth in 2019 and 2020 were revised downwards (to 3.5% from 3.7% and 3.6% from 3.7%, respectively) from October’s forecast. This downgrade was primarily driven by a weaker outlook for the Eurozone – due to factors such as weak domestic demand in Germany and Italy and the gilets jaunes protests in France – and key emerging markets (primarily due to a forecasted sharp contraction in Turkey in 2019). The IMF flagged notable downside risks to the outlook, including an escalation in China-US trade tensions and a number of potential triggers to further financial market volatility and risk aversion. The latter include continued stress in Italian debt markets, a “no deal” Brexit, and a faster-than-expected slowdown in China.

The IMF’s UK’s growth forecast for 2019 was unchanged at 1.5%, while growth in 2020 was revised up 0.1pp to 1.6% (by comparison, the CBI’s forecast for growth is 1.4% in 2019 and 1.6% in 2020). The IMF observed that the fiscal stimulus measures announced in the Autumn Budget had been offset by continued Brexit uncertainty across the forecast period. Notably, the UK forecast remained predicated on a Brexit deal being reached in 2019 and a gradual transition to a new regime, an assumption around which the IMF flagged a high degree of uncertainty.

Elsewhere, the ONS’ estimate of monthly GDP for November 2018 showed that UK growth edged slightly lower in the three months to November (0.3% from 0.4% in October). This slower momentum chimes with the softer outlook seen in the CBI’s Growth Indicator at the end of last year. Services growth softened in the quarter to November, although retail performed strongly on the back of Black Friday sales. Construction also contributed positively to economic growth, as it continued to recover from a poor start to 2018. Meanwhile, manufacturing was a drag on growth for the second rolling quarter in a row.

Encouragingly for consumers, CPI inflation slowed to its lowest rate in nearly two years in the year to December (2.1%). Falling fuel prices provided the biggest downwards contribution to inflation, while higher hotel prices were one of the primary upward contributions. Near-term risks to inflation seem to be skewed to the downside due to the recent volatility in global oil prices and softer global economic momentum. That being said, the Bank of England’s Monetary Policy Committee is likely to continue gradually increasing rates due to building domestic inflationary pressures (such as firmer wage growth and limited spare capacity in the UK economy). But, the outlook for monetary policy remains heavily contingent on Brexit-related developments in the coming months.

The latest CBI business surveys suggested that many UK businesses have been affected by the ongoing Brexit uncertainty. The CBI/PwC Financial Services Survey reported that business volumes in the financial services sector contracted for the first time since September 2013. This drop coincided with a further deterioration in financial services’ sentiment, rounding off three full years of flat or falling optimism. Financial services firms see macroeconomic uncertainty as the most important challenge over the year ahead, ahead of regulatory compliance and preparing for the impact of Brexit.

Finally, the January CBI Industrial Trends Survey reported that manufacturing output continued to grow at an above-average pace in the three months to January. Total orders were flat, however, with domestic orders reported as steady and export orders recovering only slightly from a drop in October. In particular, manufacturers reported heightened concerns about overseas political/economic conditions as a constraint on export orders. Investment intentions for the year ahead remained noticeably negative, as business sentiment dropped at its fastest since the EU referendum.

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