This year’s first summary of economic conditions looks at how the economy fared towards the end of 2018 and explores some of the issues that could affect it this year. As you may have guessed, Brexit is a key uncertainty for the economic outlook, but the health of the global economy has also been called into question in recent months.
GDP growth slowing at end of 2018
Economic growth slowed during the autumn, following a short-lived boost over the summer. GDP growth was 0.3% in the three months to November. Growth was supported by strong gains in the professional services and construction sectors, but there was weakness in other areas including car production.
Lower inflation boosts real-terms pay growth
Consumer price inflation (CPI) was on a downward path in 2018, as the effects of the pound’s decline following the 2016 Brexit referendum faded. Lower oil prices were the main factor in the most recent decline from 2.3% in November to 2.1% in December – the lowest annual rate of CPI inflation since January 2017.
Average pay growth gently accelerated towards the end of 2018, with a 3.4% increase in average earnings recorded in the three months to November 2018. With inflation rates easing, real (inflation-adjusted) average earnings growth rose to 1.0%, continuing its upward trend of recent months.
The number of people in work increased by 141,000 in the three months to November compared with the previous three months. The proportion of the working-age population in employment (75.8%) is the highest since comparable records began in 1971. Compared internationally, the UK has the third highest employment rate of the G7 economies (behind Germany and Japan).
Prospects for 2019
The economic outlook for 2019 remains dependent on Brexit developments, most notably whether the UK leaves the EU with or without a withdrawal agreement. Economists’ forecasts for GDP growth in the event of a no-deal Brexit are lower than in the event of a deal with a transition period, although there is a large degree of uncertainty associated with these forecasts.
Other things to keep an eye on include:
- Slower global economic growth – the mood music has turned increasingly pessimistic of late, with growth in the Eurozone weakening (notably in Germany and Italy), slowing Chinese growth and an “escalation of trade tensions,” according to a recent fairly downbeat IMF assessment of the world economy.
- Household incomes – the likely lower inflation outlook and higher wage growth compared with 2018, could support household spending.
- Business investment – having fallen in 2018, likely at least in part due to Brexit uncertainty, will companies continue their cautious approach or would a Brexit deal lead to a pick-up in capital spending?
Finally, the Chancellor has announced the Spring Statement is scheduled to take place on Wednesday 13 March, when new economic and fiscal forecasts from the Office for Budget Responsibility will be released.
Brexit deal: Economic analyses, House of Commons Library.
What if there’s no Brexit deal? House of Commons Library.
Daniel Harari is a Senior Library Clerk at the House of Commons Library, specialising in UK and international economies.