The SPE’s first evening meeting of the year (21 January 2019), as always, was a debate on the outlook for the UK economy. Chaired by the Society’s Sunil Krishnan, we were fortunate to have two experts in their field to discuss what is surely a highly uncertain outlook for the UK in the face of Brexit - the CEBR’s Doug McWilliams and Andrew Goodwin of Oxford Economics. The Society was once again grateful to Ashurst for hosting the event and providing the opportunity for drinks, nibbles and networking afterwards.

Doug kicked the debate off noting the slowdown in world growth and trade, as evidenced by recent weakness in air freight data. However, some of the softening should be ameliorated by policy - monetary tightening coming to an end (in those jurisdictions where it had even started) and Keynesian-style fiscal loosening - including Chinese infrastructure spending, unfunded deficits in the US and a u-turn on raising taxation in France. Cheaper commodity prices should also benefit growth in many advanced economies, but it would still be touch-and-go whether some economies would enter recession.

Doug noted that consumer confidence in the UK had fallen to its weakest since the Brexit vote thanks to a combination of political uncertainty and the failure to make a decision (as yet) on Brexit, people having “maxed out” on their credit cards and a dismal outlook for the housing market. In the auto sector diesel car prices had fallen too thanks to emissions issues.

As for Brexit, Doug forecast a sizeable rise in firms’ inventories during the first quarter of 2019 with companies planning on stockpiling ahead of the date of departure from the EU. Thereafter there would likely be a large wind-down with supply coming from shelves rather than production, explaining the CEBR’s weak forecast for growth later this year. An important point Doug made was that forecasting in the post-Brexit world should not be that difficult since if one were to discount the possibility of “no-deal”, then the options of “deal” and “remain” looked very similar in terms of what economic environment they would produce. He concluded by arguing that whatever growth we did see would end up, via technology, “stretching out” the income distribution.

Andrew began by stating his assumptions about Brexit - with 60% probability Oxford sees an orderly departure of the UK from the EU which should mean higher sterling, stronger consumer spending, looser fiscal policy and faster growth. However, at 35% he put the probability of a no deal as relatively high. In turn that would mean a large currency depreciation, trade frictions, looser fiscal and monetary policy and the UK “flirting with” recession - not a particularly bad no-deal scenario compared to peers’ forecasts. Andrew saw the chances of the UK remaining in the EU as being very small.

In his central scenario for 2019 Andrew forecast lower inflation, with prices being capped by a stronger pound and base effects. This would be helpful for consumers during a time when he is not overly optimistic about excessive rises in wage inflation (he expects 3% in 2019). Still, with interest rates and inflation low he believes even modest nominal wage growth would imply a decent rise in households’ spending power.

Andrew then turned his focus to the outlook for fiscal policy. The government’s spending plans announced in October 2018 marked a notable turnaround - a one-off substantial loosening in policy that should be positive for the economy in the near term. On the global front, while some have expressed concerns about the impact of a trade war, Andrew prefers to describe what is happening as a bilateral trade “skirmish”. Escalation of the trade spat would, if anything, be slow, and in that event policymakers could rein back policy tightening should the trade war begin to show up in more negative economic news.

Specifically, he argued that there was more stimulus left in the pipeline in the US, though did stress that we should be more concerned about 2020 in terms of the fiscal hangover. He expects a managed slowdown in China, and the euro area stabilising at “cruising altitude”. This, Andrew believes, will reflect a cooling in global growth prospects rather than an abrupt slowdown. It would, however, mean a slowdown in overseas demand for UK goods, and was therefore downbeat about the UK export outlook as a result.

Andrew finished by considering the effect on the economy of a no-deal Brexit. This would lead to the imposition of tariff and non-tariff barriers, a reduction in asset prices (including sterling to 1.10-1.12 against the US dollar), inflation peaking at 4-4.5% and lower equity prices - all partially offset by looser monetary policy. He noted that while exports would suffer so too would imports, which to some extent would limit the negative impact on GDP.

Which was rather a sober note to end on, though as far as no-deal expectations go (the Bank of England’s scenarios, for example) was no where near as dramatic as some economists have been suggesting.

Write-up by George Buckley, SPE Vice Chair