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Economic Overview – January 2020
As the new decade dawns, we find ourselves post-election in the UK in a more certain position than at any time over the last three years.
While that positivity is there – a government with a strong majority, seemingly now “getting Brexit done” and house prices starting to edge up again, it is still very difficult to predict where our economy will go in the coming 12 months. Recent Middle East tensions will inevitably also have an effect as we move into Q1.
Interest Rates and Inflation
Current Monetary Policy Committee (MPC) projections are for interest rates to remain low, potentially remaining below 1% through to the end of 2022. This will depend on the strength of economic growth over that period (see below). CPI inflation is projected to decline in the near term, in particular reflecting the impact of lower regulated energy and utility prices. The price cap affecting household gas & electricity bills has fallen, which will reduce the contribution of energy prices to inflation, as will the fall in sterling oil prices over the past year (note current Middle East tensions here).
Further out, inflation picks up, supported by rising demand (on the back of Brexit trade deals concluding), with wage growth expected to be around 3.75% over the next three years, supported by low unemployment. Monetary policy could respond in either direction to changes in the economic outlook, in order to ensure a sustainable return of inflation to the 2% target.
Potential productivity is projected to grow at around 0.75% over the three years. This is very low compared to pre-crisis rates of around 2.25%, reflecting continuing weak business investment and reduced openness as the UK transitions to its new trading relationship with the EU.
On the global stage, global GDP is also expected to remain slow, as protectionism weighs on trade flows, business sentiment, and investment. Weakness in the Euro area and some emerging market economies is expected to restrain growth in the near term. Further forward, growth could pick up further if a loosening of monetary policy ensues.
In our opinion, there is a significant pent up demand in the property market, as prospective buyers have “sat on their hands” for the past two years. House prices increased by 33.7% on average in Britain in the last 10 years, however, 10 years and 10 Housing Ministers after 2010 ushered in the decade of austerity, house prices are forecast to post modest but not spectacular gains, as buyers take advantage of rising wages and rock-bottom mortgage deals.
The UK employment rate has been very strong over the last five years (estimated at 75.1% – the joint highest on record since comparable records began in 1971). Similarly, the UK unemployment rate was estimated at 3.8%, lower than a year earlier (4%), the lowest rate since 1974. In a post-Brexit world, it is hard to see this significantly changing, which, as discussed above, with growth remaining steady, should not put undue pressure on inflation generally.