Clouded in uncertainty?
Clouded in uncertainty were the words used by the Chancellor to sum up the latest official economic forecasts, which he unveiled as part of a subdued Spring Statement. The Office for Budget Responsibility (OBR) cut their UK GDP growth forecast for 2019 from 1.6% to 1.2%, reflecting the recent slowdown in the economy. It is clear that Brexit related uncertainty is expected to remain a drag on business investment through 2019, while slower global growth will dampen trade.
Given the uncertainties facing the UK, it is perhaps surprising that the country’s economy is expected to outpace Italy or Germany’s this year. With global economies slowing, particularly in the EU, and Brexit on the horizon, growth forecasts for the UK even at 1.2% look pretty respectable.
The fact that employment is at record levels and real wage growth is nearing a two-year high, leads us to believe that the economy isn’t doing too badly - this said, it is slowing. The rolling three-month average of UK growth (GDP), a less volatile measure than the monthly figures, showed just 0.2% economic growth in January. But how much of this slowdown is due to Brexit uncertainty rather than long-term structural changes is hard to tell.
Despite the fairly cheery outlook, the caveats behind the forecasts make it a little more uncertain. The OBR’s forecasts are based on the UK leaving the EU on the 29th March with a smooth transition deal, which at the time of writing, is looking less likely than ever. If the UK doesn’t leave the EU with a deal in place on the 29th March, further short-term downgrades are likely to be on the horizon. As the saying goes, “every cloud has a silver lining”. And the good news is that despite the short-term downgrade for 2019, the OBR expect the economy to grow more than they’d previously expected in the future. Whatever short-term pain the economy may feel, it will start to grow again.
OBR's GDP Forecast