Economic update - first quarter 2020
Key points
- Prior to the coronavirus outbreak (which poses some downside risks to the forecasts set out here) there were signs of stabilisation in the global economy. Confidence has been buoyed by the signing of a preliminary trade agreement between the USA and China, and by the clear-cut result of the UK’s general election in December, while the global manufacturing sector appears to have bottomed out.
- But pulling the global economy out of its malaise will take time, with GDP growth expected to be very similar next year to this year. Central banks have limited monetary firepower left, and some of the adverse consequences of negative interest rates are receiving more attention. Some governments will help with modest fiscal stimulus programmes, but these are unlikely to make a material difference.
- In the UK, the orderly exit from the EU heralds an 11-month transition period during which the future relationship with the EU will be negotiated. The most likely outcome is that a basic trade agreement will be concluded during the course of this year, though there is still a risk that no agreement is reached, which would mean that UK trade with the EU would shift to World Trade Organization terms from the start of next year.
- Confidence has revived, among both businesses and households, since the General election. This will eventually be reflected in ‘hard’ economic data, with particular scope for a strengthening of consumer expenditure. But GDP growth this year is only expected to amount to an anaemic 1.1%, with the running down of inventories and tougher conditions for exporters acting as drags.
- With the annual rate of inflation set to remain below 2% for the next two years, the Bank of England is expected to cut UK Bank Rate by 25 basis points in May. Before then, the Budget on 11th March will flesh out the Government’s new fiscal framework and set in motion an increase in infrastructure spending aimed at a regional ‘levelling up’ in the north of England and the midlands.