United Kingdom: Economy flatlines in Q4 2019 as political uncertainty bites
February 11, 2020
The economy flatlined in Q4 in quarter-on-quarter (qoq) seasonally-adjusted terms, down from Q3’s revised 0.5% expansion (previously reported: +0.4% quarter-on-quarter) and matching market expectations. In annual terms, growth slumped to 1.1% from Q3’s revised 1.2% (previously reported: +1.1% year-on-year). As a result, over 2019 as a whole, growth was a mere 1.4%.
Heightened political uncertainty in the run-up to the December elections hit fixed investment (Q4: -1.6% qoq; Q3: +0.3% qoq) and likely weighed on private consumption too (Q4: +0.1% qoq; Q3: +0.4% qoq) notwithstanding a firm labor market. In contrast, government spending provided support (Q4: +2.1% qoq; Q3: +0.3% qoq).
Exports were up 4.1% qoq in Q4, building on Q3’s 5.9% expansion, although this was partly due to temporary factors, chiefly strong shipments of precious metals. Imports contracted 0.8% (Q3: +1.2% qoq), with the external sector contributing 1.6 percentage points to growth as a result.
There is a wide divergence in panelists’ views regarding the 2020 outlook. Kallum Pickering, an economist at Berenberg, is broadly upbeat: “While the risk of a disorderly Brexit at the end of the year will remain a worry for markets, households and businesses, the election has tilted the balance of factors that will determine the medium-term path of GDP to the upside. […] Expect a major step up in investment spending at the upcoming budget on 11 March. Fiscal stimulus could contribute 0.7ppt to headline GDP growth in 2020”.
However, Daniel Vernazza, an economist at UniCredit, is notably gloomier: “Brexit-related uncertainty will persist, global growth will probably weaken slightly further, and the “Boris bounce” is likely to be modest and short-lived. The next UK Budget will be held on 11 March, but it’s unlikely to be a gamechanger. In our view, the risks to growth are skewed to the downside, with the new coronavirus raising uncertainty.”
The Consensus expects growth to remain muted over 2020 as a whole, notwithstanding the reduction in political noise following the elections. While a loose fiscal stance and strong labor market should support consumption, lingering uncertainty over the future of the UK-EU trading relationship will cap business investment.
Author: Oliver Reynolds, Economist