The warning signs of 2019 are lighting up for the UK economy as Brexit comes to a head.
Retailers are complaining about an abysmal holiday season, house prices are weakening, businesses are holding back investment and the swooning pound is fuelling inflation. With just a few months until the March 29 deadline to exit the world’s biggest trading bloc, there’s no clarity on whether Britain will crash out of the European Union without a divorce deal.
"You obviously need demand" for companies to do well, said Lucy MacDonald, chief investment officer for global equities at Allianz Global Investors in a Bloomberg Television interview. "With what’s happening in the UK" right now, "it’s not an environment where people feel very confident."
While Bank of England Governor Mark Carney says the financial sector is ready for whatever comes, and that interest rates may need to move up or down after Brexit, markets are paring bets on any more increases in the benchmark next year. The central bank’s policy makers are meeting this week, with all but one of 61 economists in a Bloomberg survey predicting it will be kept unchanged at 0.75 percent on Thursday.
The doom and gloom across the economy was highlighted by web retailer Asos Plc, which warned on Monday that its Christmas shopping season got off to a disastrous start, confirming fears that even e-commerce isn’t immune from a crash in consumer confidence. The slump in economic activity was further evident in asking price for houses, which recorded the steepest back-to-back declines since 2012, according to data from Rightmove.
Reports Tuesday highlighted the scale of the challenge ahead. The British Chambers of Commerce today forecast that business investment will grow by just 0.1 percent in 2019 -- a cut from its previous prediction of 1.2 percent. Meanwhile, the Royal Institution of Chartered Surveyors said its sees house price growth coming to a standstill next year, as overall sales volumes drop 5 percent.
What Our Economists Say... "The uncertainty shock associated with leaving the EU now appears to be rearing its head, having been notable by its absence in the immediate aftermath of the referendum. We expect uncertainty to linger in 1Q with the economy’s performance beyond that tied almost entirely to the outcome of the Brexit talks."-- Dan Hanson, Bloomberg Economics.
The bright spot is the labor market. Basic wages in the country rose at the fastest in nearly 10 years between August and October, and unemployment was just shy of its lowest rate since 1975. While that would normally prompt the BOE to prepare the ground for higher borrowing costs, they probably won’t rush to act while Prime Minister Theresa May is trying to strike an EU divorce deal that’s acceptable to lawmakers.
The pound, which traded above $1.40 earlier this year, has retreated to around $1.26. That’s eroding shoppers’ purchasing power and fanning inflation, which economists expect to have held above the BOE’s 2 percent target last month. Official statistics on consumer prices are due on Wednesday, and retail sales figures will be published Thursday.
Avoiding a chaotic no-deal Brexit could see the economy bounce back in the second half of next year with household spending and labor markets aiding a recovery, said Victoria Clarke, an economist at Investec.
A deal is a long shot, though, as things stand now. May does not have the majority support in Parliament to back her initial agreement, while EU maintains it will not give any further concessions.
The uncertainty is poison. As Carney says, Brexit is the biggest determinant to the outlook for the economy.
"All of the sentiment surveys have been suffering, and everybody’s just shouting for this to be sorted out," Investec’s Clarke said.