The January 2020 Economy – In one paragraph
Partly as a consequence of the US led trade war and resulting increased tariffs, world growth is slowing. The problems with the Italian banks and the changes in the automotive sector mean that is especially true in the EU. However after a volatile few years and very slow growth last year, the UK economy is expected to pick up a bit in Q1 2020, but is unlikely to return to normal levels of growth unless productivity improves. And productivity improvements take a long time (at least three-five years) to take effect so that is unlikely in the short term.
The January 2020 Economy – In summary
Global growth has been slowing, largely as a result of increased tariffs slowing world trade. Tariffs have risen very significantly completely reversing the global free trade liberalisation of the past fifty years.
Growth in Europe is very slow for a range of reasons including the challenges in the automotive industry (which is hitting the German economy) and the Italian banking crisis, which whilst quiet at the moment, is still not resolved. As a result the European Central Bank is pursuing an expansionary fiscal policy with low interest rates and Quantitative Easing.
Brexit has created uncertainty which led to weak business investment and although real wages improved significantly in 2019 to c3%, consumer spending was cautious. As a result UK economic growth in 2019 was very volatile and slow at a rate of just 0.2% per quarter in 2019 compared to the long run average of about 0.5% per quarter.
Consumer confidence began to pick up late in 2019 and early signals from business surveys such as the IHS Markit / CIPS index suggest growth will pick up in 2020 but it is not expected to return to the long term 2% trend within the forecast horizon.
Productivity, which used to improve at approximately 2% per annum, now seems to be stuck at around half percent. Combined with very low unemployment and increasing wage growth there is very little slack in the economy to support faster growth. (Interest rate changes take up to two years to impact inflation and growth. Productivity results from long term investments that take many years to impact on performance)
Energy price falls in most of 2019 kept inflation low. Inflation has been low for a long time across all the 36 most advanced economies. There is now debate in academic economist circles as to whether controlling inflation is the priority challenge it once was.
Whilst real wages have increased and unemployment is at a record low, base interest rates remain low at 0.75%. The MPC have been considering a rise but at the last meeting it was agreed to postpone such a decision.