Economic Review – January 2020

5th February 2020


The UK officially left the EU on 31 January and is now embarking
on an 11-month transition period during which formal trade
negotiations will take place.

Brexit has undoubtedly been an arduous process, costing two British
Prime Ministers their jobs and dividing families the length and breadth
of the country. However, since Boris Johnson won a landslide victory in
December’s election with a mandate to ‘get Brexit done‘, the UK had
been heading inexorably towards the EU exit door.

The final hurdle in the 1,317-day saga was safely cleared when the
European Parliament rubber-stamped the Withdrawal Agreement on 29
January. And, at the stroke of 11pm on 31 January, the UK ceased to be
a member of the EU; the divorce had finally been sealed.

In many ways, however, while Brexit day carried huge political
symbolism – with a commemorative 50p coin minted to mark the
occasion – little will change initially as the country enters a transition
period due to last until 31 December 2020. So, while UK citizens are
no longer EU citizens, the country remains in the EU single market and
customs union and will continue to follow EU rules.

More significant changes are likely to occur on 1 January 2021, the UK’s
first scheduled day outside of EU rules. And what happens then will
depend upon the type of deal the UK manages to negotiate with the
EU. Formal trade talks are due to start towards the end of February or
early March with the British government’s stated aim to secure a ‘zero
tariff, zero quota
‘ free trade deal by the end of 2020.

With trade deals typically taking years to conclude, there is scepticism
that negotiations can be completed within such a short timescale.
However, while reaching agreement on a comprehensive deal by the end
of 2020 may prove elusive, securing a ‘bare bones’ package covering
areas such as trade, fisheries and security certainly could be achievable.

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Although data released by the Office for National Statistics
(ONS) has confirmed the economy was weak during the final
few months of last year, recent survey data points to a potential
pick-up in economic activity.

Gross domestic product statistics released by ONS showed the
UK economy grew by a lacklustre 0.1% in the three months to
end-November 2019. Additionally, year-on-year growth across the
September–November period slowed to just 0.6%, from 1.0% in the
previous three-month period; this represents the lowest annual rate of
expansion since spring 2012.

This sluggish performance last autumn, however, partly reflects the
heightened political uncertainty relating to Brexit and the forthcoming
general election at that point in time. And, more recently, there have
been clear signs of a post-election pick-up in the economy with survey
evidence pointing to improved business sentiment and growing
consumer confidence.

For instance, the January UK Purchasing Managers’ Index found that
companies enjoyed their best month for over a year, while a recent
Confederation of British Industry survey pointed to a record jump in
confidence amongst manufacturers. There have also been signs of the
public adopting a more upbeat demeanour in the aftermath of the
election, with a survey commissioned by Barclaycard revealing a distinct
rise in consumer optimism.

Whether or not this improved level of confidence will translate into a
meaningful and sustained boost to economic growth remains to be
seen, but economists have certainly been heartened by improvements
across such a wide range of indicators since the general election result
was announced. And there is certainly growing optimism that the UK
economy has enjoyed a relatively encouraging start to the new year.

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(Data compiled by TOMD)

At the end of January, several major global markets closed in
negative territory. The recently signed US-China trade deal was
expected to lift the global economy, but the coronavirus outbreak,
coupled with lethargic US economic data and mixed corporate
earnings, has intensified global growth concerns.

In the UK, the FTSE 100 closed on Brexit day down 3.40% to end January
on 7,286.01. The FTSE 250 followed suit, losing 3.38%. The mood was
similarly negative on European markets, as the Euro Stoxx declined 2.78%
in the month. In the US, the blue-chip Dow Jones Industrial Average had
its first monthly loss since August, while the Nasdaq was supported by
strong earnings from Amazon.

On the foreign exchanges, sterling closed the month at $1.32 against the
US dollar. The euro closed at €1.18 against sterling and at $1.12 against
the US dollar.

Gold had its best performance in five months as concerns drove investors
toward safe-haven assets. The precious metal is currently trading at
around $1,590.14 a troy ounce, a gain of 4.82% on the month.

Crude prices slipped as disruptions to supply chains and travel curbs took
hold. Traders continue to worry about the virus’ impact on global demand.
Brent crude is currently trading at around $56 a barrel, a loss of over 15%
on the month.


(at 31/01/20)
(since 31/12/19)
  FTSE 100 7,286.01 3.40%
  FTSE 250 21,143.49 3.38%
  FTSE AIM 950.99 0.76%
  EURO STOXX 50 3,640.91 2.78%
  NASDAQ Composite 9,150.94 1.99%
  DOW JONES 28,256.03 0.99%
  NIKKEI 225 23,205.18 1.91%

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Despite the rate of inflation in the UK falling to its lowest level
in more than three years, the Bank of England (BoE) once again
opted to leave interest rates on hold.

Official ONS data showed that the Consumer Prices Index 12-month
rate – which compares prices in the current month with the same
period a year earlier – stood at 1.3% in December, lower than all
forecasts in a Reuters poll of economists. It was also lower than the
1.5% rate recorded during the previous month and means that prices
are now increasing at their slowest pace since November 2016.

This easing of inflationary pressures was partly driven by a fall in
hotel room costs, with ONS saying that a third of all hotels surveyed
in December reported falling prices, compared with just one in 10
that reported an increase. Steep reductions in the price of women’s
clothing also helped push down December’s overall rate of inflation.

However, despite the benign inflation data, the BoE once again
decided to leave interest rates unchanged following the latest
meeting of the Monetary Policy Committee (MPC) on 30 January. In
Mark Carney’s final rate-setting meeting as Governor, the MPC voted
7-2 to maintain its existing monetary policy stance and leave the Bank
Rate on hold at 0.75%.

A spate of soft economic data had fuelled speculation that rates would
be cut at this meeting, but instead policymakers said they wanted to
monitor whether a post-election pick-up in business sentiment would
lead to stronger growth. The minutes of the meeting, though, did state
that the MPC remained poised to reduce rates, if necessary. The next
meeting is scheduled to take place on 26 March and will be the first
chaired by new BoE Governor Andrew Bailey.

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Chancellor Sajid Javid has promised an ‘infrastructure revolution’
when he delivers the country’s first post-Brexit Budget on
Wednesday 11 March.

The annual fiscal event, which was delayed from last autumn due to
the general election, will allow the government to formalise spending
commitments made during the election campaign. Announcing the
revised date at a construction site in Manchester, the Chancellor
pledged billions of pounds in infrastructure spending, with a shakeup
of Treasury rules likely to see higher levels of investment directed
towards projects in the Midlands and north of England.

Following the announcement, Mr Javid said: “We set out in our
manifesto how we can afford to invest more and take advantage of
the record low interest rates that we are seeing. There will be up to an
extra £100bn of investment in infrastructure over the next few years
that will be transformative for every part of our country.

Meanwhile, the latest public sector finance statistics released by ONS
provided the Chancellor with a modest degree of cheer. UK public
sector net borrowing (the gap between the country’s overall income
and expenditure) totalled £4.8bn in December 2019. This was £0.2bn
less than the same month of the previous year and £0.5bn below
market expectations.

This better-than-expected December figure, allied with new rules that
will allow the Chancellor to increase public borrowing in order to invest
for the future, will provide some potential room for manoeuvre as Mr
Javid finalises his Budget plans. However, total borrowing across the
first nine months of the fiscal year still amounted to £54.6bn, a £4.0bn
increase on the same period of the previous financial year, and this will
inevitably provide some restraint to the Chancellor’s spending ambitions.

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