Sunday, January 05, 2020
Hoping for the best on Brexit and world trade
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

This is a time for looking forward, not back, but I thought it would be instructive to look back briefly at what I have said in recent years in these new year pieces. This time last year I wrote that the economic outlook depended to a disturbingly large extent on achieving a smooth Brexit but I was also worried about the balance of payments.

I was right to be worried. Though there was an improvement in the third quarter, the current account deficit in the first quarter was an elephantine £37.4bn, 6.8% of gross domestic product, slipping to 4.4% in the second quarter and 2.8% in the third. It remains hefty.

Two years ago, after a good year for the global economy, which had helped cushion the effects of Brexit uncertainty on Britain, the question was whether it would continue. But 2018 turned out to be disappointing, mainly because of Donald Trump’s trade wars. Protectionism, as in the past, had showed itself to be detrimental to growth.

The global economy was also a theme three years ago, when it was possible to look ahead to a brighter period for the global economy, which was helping the economy in Britain. So it turned out. In 2017 America and the world benefited from “good” Trump, the tax-cutting one. Sadly, that version did not last.

Four years ago, and it seems like an age, I wrote that the EU referendum was the biggest cloud on the horizon, as it has proved. The question now is whether that cloud has lifted.

The two themes of the past four years remain the most relevant now. Certainly, I would hope to be writing a lot less about Brexit in the coming year. Will decision makers in the economy put it to one side? If so, could that combine with a better outlook for the world economy, driven by an easing of trade tensions, than last year’s weakest-since-2009 performance, so that things could turn out better?

Most forecasters, it should be said, are maintaining a cautious attitude to the prospect of a meaningful growth revival this year. If I take those which topped my annual forecasting league table last week, their growth predictions, as submitted to the Treasury’s monthly compilation, published just before Christmas on December 18, were still pretty downbeat.

Santander has a prediction of 1% growth for 2020, as did HSBC and Schroders, with Natwest Markets and Daiwa Capital Markets slightly stronger at 1.3%, and Pantheon Macroeconomics 1.4%. The average growth prediction for 2020 was just 1.1%, which would make 2020 the weakest year since the horrible year of 2009.
If there is a health warning to be attached to these forecasts, going beyond the normal note of caution, it is that most forecasters have yet to take full account of Britain’s changed political situation and, for the first time, near-certainty about the date of Britain’s formal departure from the EU.

This opens up a real-life economic experiment. Has it been just the uncertainty bearing down on the economy’s performance? Or is it the predicted economic hit as we move towards a weaker relationship with our biggest trading partner? I would argue mainly that second of these, while not ignoring the uncertainty factor. But we should also remember that, as far as business investment is concerned, as I have long argued, the uncertainty will not end on January 31. The latest Bank of England decision maker panel survey shows that 53% of firms think Brexit will remain a major source of uncertainty, with a significant proportion not expecting it to be resolved until at least 2021.

I am not suggesting, on any scenario, that we should be looking forward to a Boris boom or, as one Tory-supporting tabloid newspaper oddly had it, a roaring twenties (there was a general strike in the last one, and the Great Depression followed it).

The jury is still out on the new government. Its first few months last year, dominated as they were by Brexit and parliamentary shenanigans, saw a lot of talk about the future but very little action. Blue-sky thinking is all very well but it needs to be applied.

The currency market, which tracks these things well, has already delivered its initial verdict. Sterling was pushed higher on a bigger Tory majority than had been expected, though not hugely, and then fell back to pre-election levels, because of the government’s insistence that it would maintain a hard line on not extending the Brexit transition period beyond the end of this year.

We shall see how that pans out. Some who have had a more detailed look at things since the election see little reason to amend the outlook at this stage. The Resolution Foundation, a think tank, suggests the 1% growth in prospect for this year poses a risk to the job market. It notes three 2019 trends that may have further to run; declining job vacancies, weak employment intentions from firms and a drop in employment among 18-24 year-olds, who are often the first to feel the effects of a colder wind blowing through the labour market.

One of the unusual features of recent years has been that weaker economic growth has not resulted in greater pain in the job market, though some would say that pain has been reflected in weak wage growth and, for some, insecure employment.

Not many forecasters expect unemployment to continue to fall this year. One milestone should, however, be passed. 2020 should be the year when real wages finally move above their pre-crisis peak, a dozen years ago. Thus, the longest squeeze on real wages in the modern era will come to an end. The hope has to be that this is not a false dawn, and that stagnant productivity will not renew the pay squeeze.

If Brexit is a subject I would be hoping to write less about in 2020, and indeed in the coming decade, so very definitely is stagnant productivity. The Royal Statistical Society (RSS) made its statistic of the decade the 0.3% annual rise in productivity over the past decade or so, compared with a previous norm of 2%.

It was, if anything, a little generous. You can do the numbers to show that the latest reading for output per hour, in the second quarter of last year, was a mere 2% higher, in total, than in the final quarter of 2007. But productivity needs all the help it can get, so I would not begrudge it the RSS figure.

Will this be the year of a productivity breakthrough? These things sometimes happen when you least expect it. Forecasters have got pretty fed up of predicting a productivity upturn that never seems to happen. Like a stopped clock, the predicted productivity revival will at some stage be proved right. We can only hope this is the year in which that is no longer triumph of hope over experience and productivity indeed perks up.