ECONOMIC DEVELOPMENTS AND RISKS TO THE UK ECONOMY

Read the Young Fabians Macroeconomics February Update

In the UK, post-election readings of the economy have indicated a bounce in sentiment as several indicators such as business and consumer confidence as well as the UK PMI (The Purchasing Managers' Index) have improved. However, this impact might be short-lived, as many of the drags to the economy are still in place including a challenging global economic environment and still considerable longer-term Brexit uncertainties.

Technology and business services were areas of strength on the UK mergers and acquisition (M&A) market in 2019. However, the slowdown in global M&A activities since the second half of 2019 has continued in the beginning of 2020.

In the UK, the uncertainty around whether a free trade agreement with Europe can be in place by the end of 2020 led to subdued business expectations and muted investments across all sectors.

GDP quarter-on-quarter growth ended 2019 at a flat rate following a year of volatile movement due to uncertainty relating to the UK’s departure date from the European Union (EU).

Figure 1 GDP quarter-on-quarter growth[1]

GDP quarter-on-quarter growth

Growth in the services and construction sector was offset by negative growth in the manufacturing sector in the last quarter of 2019.

Figure 2: Contribution to growth[2]

GDP quarter-on-quarter growth

RISKS TO ECONOMIES BEYOND THE UK

Looking beyond the UK economy, China had overseen the rapid spread of the coronavirus virus and expects it to weaken its GDP growth sharply in the short term. There are signs that the speed of the infection is slowing. Given the uncertainties around how quickly the economy will be back to normalcy, the risks are on the downside.

The Eurozone has experienced its weakest growth since 2013 (0.6%). The effect of the coronavirus on global supply chains is likely to keep growth subdued in the short term. But the economy should slowly pick up later in 2020 as the drag from the inventory cycle ends and global trade edges up.

Meanwhile, in the US growth remains robust, stabilising at 2.0%. A mild impact is expected from coronavirus, but with downside risks. However, a looser fiscal stance and stronger household spending power should generate a gradual pickup in quarterly growth rates.

RISKS TO THE GLOBAL ECONOMY

According to the Oxford Economics Global Risk Survey, the escalation of US-China trade war remains as the biggest downside risk to the global economy. Nevertheless, the Coronavirus epidemic has stunned China’s growth and the knock-on effects on the rest of the world are significant.

Global stock markets have continued to trend upwards in the months entering 2020, despite a dip in January most likely caused by the global supply chain disruptions due to the Coronavirus epidemic.

The implementation of global-wide travel bans and a reduction in overall consumer demand for goods have resulted in lower global demand for oil. The effect of this is a fall in Brent crude oil prices being its lowest since December 2018.

Figure 3 Brent crude oil prices[3]

Brent crude oil prices

Figure 4 Oxford Economics Global Risk Survey answers to the question “What do you see as the top three downside global economic risks over the next two years?”[4]

Oxford Economics Global Risk Survey answers to the question “What do you see as the top three downside global economic risks over the next two years?”

This post was co-authored by Chris Wongsosaputro, Chief Macroeconomist of the Young Fabian Economy and Finance Network and Amarvir Singh-Bal, The Secretary of the Economy and Finance Network and lead of the Economic Update Team.

 

 

 

[1] Office for National Statistics

[2] Office for National Statistics

[3] U.S. Energy Information Administration

[4] Oxford Economics Global Risk Survey

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