CBI Monthly economic brief - January 2019
The UK economy grew by 0.6% in Q3 2018 according to the ONS’ second estimate of GDP, unrevised from the first estimate. Meanwhile, strong retail sales data in November may be masking softer underlying momentum.
Business surveys suggest a softening in growth momentum in the fourth quarter of 2018.
- Bank of England MPC voted unanimously to keep interest rates on hold and stated that Brexit uncertainty could cause volatility in UK growth.
- Underlying growth has largely evolved as we had expected during 2018, at a slow and underwhelming pace (averaging 0.4% per quarter since the EU referendum). We expect similar growth to persist ahead, with the economy expected to have grown by 1.3% in 2018, and a similar pace expected in 2019 of 1.4% – broadly unchanged from our previous forecast (1.4% and 1.3% respectively). We expect growth to pick up slightly in 2020 (to 1.6%), but to remain below pre-crisis norms (GDP growth averaged 2.9% between 1997 and 2007).
- Key features of our forecast include:
- Household spending remains subdued, with real incomes growth staying weak. Consumer spending growth picks up somewhat over 2020 as real earnings continue to recover, though both remain below their pre-crisis averages.
- Brexit uncertainty – particularly uncertainty around the full end-state of the UK’s relationship with the EU – continues to weigh on business investment. We expect some firming in growth towards the end of our forecast period, as uncertainty lifts and the impact of greater automation spending kicks in (our forecast is predicated on the UK entering the transition period after 29th March).
- Support to growth from net trade peters out over our forecast. While decent global growth continues to support exports, this is largely matched by a mild pick-up in import growth, supported by a firming in domestic demand.
- We also now expect a little more support from government spending, following announcements around increased spending on the NHS.
- Our forecast is conditioned on the Withdrawal Agreement being ratified – particularly the implementation of a transition period until at least the end of 2020 – thus ensuring a smooth transition to a new relationship with the EU.
- The prospect of a “no deal” remains the most immediate risk to the UK economy, and would likely lead to both greater financial market volatility and weaker economic growth than in our baseline forecast (depending on how long the UK remained in a no deal relationship with the EU). GDP growth would likely be more volatile in the near-term too, particularly if firms turn to stockpiling in the event of a no deal.
- The global economy continues to expand at a decent pace, although the pace of expansion has slowed since the start of 2018. This reflects a combination of factors, such as the maturing of the economic cycle in key markets (such as China), higher oil prices, tighter global financial conditions, and the impact of rising trade tensions on business confidence. Nevertheless, the slowdown in global growth is expected to be gradual and the global economy is still expected to expand at a relatively healthy 3.7% in 2018, 3.4% in 2019 and 3.5% in 2020.
UK GDP growth unrevised at 0.6% in Q3 2018
The UK economy grew by 0.6% in the third quarter of 2018, unrevised from the first estimate. Q3 GDP growth was supported by the warm weather, which provided a boost to a broad range of sectors. The expenditure breakdown presented a mixed picture: despite solid household spending, business investment fell for the third quarter in a row.
Strong retail sales data may be masking softer underlying momentum
Annual retail sales growth picked up to 3.7% in November (from 2.4% in October), the strongest since July 2018 (3.9%). However, the strength of sales in November may have been flattered by discounting around “Black Friday”, which is difficult for the ONS to account for when seasonally adjusting their figures. Data for the last few years suggest that consumption patterns are gradually moving towards higher spending in November at the expense of December volumes.
CBI surveys indicate that private sector tailed off towards the end of 2018
Looking forward, we expect UK growth to have returned to a more subdued rate in Q4, as the temporary factors that supported economic activity in Q3 fade away. The CBI’s growth indicator showed that private sector activity remained unchanged in the three months to December. The stagnation in overall volumes reflected falling services volumes, which was offset by strong growth in manufacturing and steady growth in distribution. Within distribution, wholesale and motor trades saw solid volumes growth while retail volumes fell at the fastest pace since November 2014. This chimed with the Markit/CIPS PMIs that also signalled slower growth momentum in Q4. The composite PMI indicated that growth increased slightly in December, due to a slight pick-up in services growth and a further improvement in manufacturing growth. Nevertheless, the readings in November and December remained the slowest rates of expansion since the EU referendum.
The CBI’s growth indicator suggests that activity is set to remain steady overall in the first quarter of 2019, with the volume of business in services and retail expected to continue declining at the same pace, alongside slower growth in manufacturing and distribution.
Bank of England’s MPC keep interest rates on hold
The Bank of England’s Monetary Policy Committee (MPC) voted unanimously (9-0) in December to maintain base rates at 0.75%. The MPC’s guidance on the future path of rate rises remained unchanged: an ongoing tightening in monetary policy will be necessary to return inflation to target, assuming that the economy continues to evolve in line with the MPC’s forecast.
CPI inflation came in at 2.3% in November, down slightly from 2.4% in October. The Bank of England now expect CPI inflation to fall to 1.75% in January due to falling oil prices, before continued domestic inflationary pressures (most notably wage growth) return inflation to target in subsequent months.
The Bank’s forecasts remained conditioned on the average of a range of outcomes for the UK’s future trading relationship with the EU. The MPC reiterated in the meeting minutes that their action in response to a no-deal Brexit was not an automatic rate cut, as no deal has impacts on both the supply-side and demand-side of the economy, and thus their action will depend largely on the balance of these two effects. They expect GDP to have grown by 0.2% in Q4 2018 and to remain at this rate in Q1 2019. However, the Bank observed that the impact of Brexit uncertainty on household and business behaviour could lead to greater volatility in growth.