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Economic update: November and December 2019

Economic growth is weak despite some uplift in service industries. It remains to be seen if the early signs of improving business confidence due to the clear election result are reflected in economic data. Government borrowing has risen this fiscal year, and there are plans to borrow more to invest in infrastructure across the country. The labour market remains strong but there are regional disparities in the quality of jobs.

Stalling growth

In August-October 2019, UK economic growth was flat compared with the previous quarter (May-July 2019). With a 0.2% increase in output, services were the only major sector positively contributing to GDP growth in this period. Services currently account for around 80% of UK economic output.

Growth in services was offset by the contraction of total production output by 0.7% and a 0.3% decline in construction in the three months to October 2019, compared with the previous three months. The fall in production was largely due to the weak performance of factories seen since April. Efforts to reduce Brexit-related stockpiles may have also negatively affected manufacturing orders.

Compared to the more volatile short-term estimates, the Treasury’s December 2019 survey of independent forecasts projected that GDP would grow by 1.3% in 2019 and by 1.1% in 2020.

Both imports and exports increased in the three months to October 2019, by 5.6% and 4.4% respectively (both figures in cash terms). The UK’s trade deficit – the amount by which its imports exceed exports – widened to £7.2 billion compared with £4.8 billion in the previous three months.

The CPI inflation rate remained steady at 1.5% in November, below the Bank of England inflation target of 2%.

Election result injects some optimism

The General Election campaign dominated the end of 2019. Political uncertainty has decreased following the Conservative party winning a sizable majority, which seems to have improved business confidence (paywall). The UK Purchasing Managers’ Index showed an increase in its overall activity measure to 50.0 for services in December 2019, up from 49.3 in November. An index value above 50 means activity in the sector is expanding. This is the biggest upwards movement in the Services PMI since July 2019, but the index remains at low levels historically. Economists will be waiting to see if this optimism is reflected again in data to be published this month.

However, manufacturers’ confidence continued to be low. In December, the CBI found that more manufacturers thought the output would fall over the next three months than thought it would rise. The difference was -7% of manufacturers, down from -1% in November.

How long will this bounce last?

An annual FT survey of more than 85 economists indicates that any bounce that the UK economy received from the decisive Conservative election victory may be short-lived. There is no long-term certainty about the effects of Brexit or the future UK-EU relationship. Whether the UK economy will be able to benefit from global trade will depend, among other things, on developments of trade and political tensions between the US, China and other major players. The World Bank forecasts modest global growth in 2020, but the outlook is fragile.

Government borrowing is rising as the Budget is expected in March

Government borrowing has risen so far this year, although not as quickly as the OBR forecast for the whole year. Public sector net debt amounted to 80.6% of GDP at the end of November 2019, lower than at the end of November 2018.

The Chancellor announced the date of the delayed Budget as 11 March. The first budget of Johnson’s Government was to be on 6 November, but it was delayed as the Government pushed for an election. In the budget we can expect to hear more about the Chancellor’s plans to borrow more to invest in infrastructure across the country. Manifesto tax pledges, such as increasing the threshold at which workers start making National Insurance contributions, will also feature. The Chancellor’s commitment to end borrowing for day-to-day spending constrains his ability to deliver further significant tax cuts or spending increases in the budget.

The labour market continues to be strong

The number of people in employment has been rising almost continually since 2012 and is at record levels. The employment rate (the proportion of the population aged 16-64 in work) was 76.2% in the 3 months to October 2019, up from 75.7% a year previously. The unemployment rate (the percentage of the economically active population who are unemployed) was at 3.8% at its joint lowest level since 1975. But some economists point towards poor quality jobs (insecure contracts, in-work poverty) and regional disparities, which threaten the sustainability of this (paywall) level of employment.

Average weekly total pay increased in real terms (inflation adjusted) by 1.7% excluding bonus pay and by 1.4% including bonus pay in the three months to October 2019, compared with the year before. Although earnings are growing faster than inflation, average wages in real terms remain below their pre-crisis levels in 2007.

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