This year has been a shocker – but it looks like better times lie ahead
Political certainty can lift the UK economy, while the US and China may even have resolved their spat
What a rum year 2019 has been. For the world economy, things have been pretty bad. Chinese growth has been weak, while there has been a slowdown in the United States, causing interest rates to be cut. And the eurozone has been exceedingly weak, with Germany and Italy teetering on the edge of recession.
The big story in the global economy has been the tariff war between the US and China. As the year closes, however, the recent truce has brought some optimism. It is early days, and things could yet go wrong, but I suspect the worst of the trade spat is over.
In this country, economic growth has been fairly weak. For the year as a whole, it looks as though the economy grew by only about 1.25pc. Mind you, as before, this has not stopped employment growth from continuing strongly. Unemployment stands at 3.8pc, the lowest for almost half a century. Meanwhile, inflation has remained very low and interest rates have been kept steady at the amazingly low level of 0.75pc. But it seems obtuse in the case of the UK to give much attention to such mundane pieces of economic data. For the really momentous news has been political.
For most of the year, we have lived in a state of profound uncertainty about both our own government and our relationship with the European Union. Remarkably, we have managed to end the year in a very different position, with the Prime Minister now commanding a massive majority in the House of Commons and set on a course for Brexit on Jan 31. In economic terms, 2019 may well be a year to forget, but in political terms it is surely a year to remember, if not to savour.
As things stand, I am reasonably hopeful about the year ahead. Despite the Chinese economy looking rather soggy, in the second half of the year the world economy may pick up. Although the danger of a recession in the US is not entirely over, this risk has faded and you can already begin to see some signs of a rebound from recent slow growth. Admittedly, in the eurozone things still look pretty grim. Yet, by the end of 2020 there may be the beginnings of a feeble recovery even there.
Turning to matters here, there are two major factors that could bring a decisive change. The first is the consequence of Boris Johnson’s election victory and the resulting clarity about our exit from the EU. According to Remainers, the 2016 Brexit vote has weakened UK economic growth, mainly because the attendant uncertainty has caused investment to be cut back or delayed. It is impossible to be sure of the extent of any such effect but the numbers are consistent with the idea that this has, indeed, been a major factor. Yet, even though some considerable uncertainty remains, not least about the terms under which we will trade with the EU after the end of the transition period at the close of next year, Brexit uncertainty has diminished.
Meanwhile, the Jeremy Corbyn uncertainty has been eradicated. I suspect that investment will pick up quite strongly in 2020, with a further surge to come the following year, after the UK concludes a trade deal with the EU. I wouldn’t be surprised to see consumer confidence improving, too.
The second major factor is the possibility of fiscal stimulus. The Government has clearly broken out of the austerity mindset that has dominated since 2010. Not only is the deficit much lower than it was, but interest rates are at rock-bottom levels.
Sajid Javid, the Chancellor, clearly has his spending boots on. But matters are not quite so simple. The Office for Budget Responsibility (OBR) may be pretty pessimistic about the UK’S growth prospects, and hence also about the outlook for the public finances. Mr Javid has pledged to avoid borrowing to finance current spending
‘Ministers have been bursting with ambition about what they want to achieve via increased public spending’
and has constrained his undoubted ambitions to spend more money on public investment, which he argues can plausibly run at about 3pc of GDP. Yet over recent weeks, ministers have been bursting with ambition about what they want to achieve via increased public spending, and not all of it on investment.
Moreover, in the background there is the Conservatives’ lingering ambition to reduce taxes for ordinary people, higher earners and companies. How will the Chancellor square this circle? He may find himself obliged to be modest in what he is able to do in the coming first budget of the new government. But, if so, I doubt that this modesty will last long. Something will have to give. Of course, it could be the scale of the Government’s ambitions. But I doubt it. Either the OBR will become more optimistic, thereby allowing Mr Javid more fiscal headroom, or the newly minted fiscal rules will somehow or other have to be relaxed.
At the moment, the markets and most financial commentators are wondering whether the Monetary Policy Committee (MPC) will decide to cut interest rates. For the moment, though, surely the right thing for the MPC to do is to sit on its hands and wait. But if I am right about the recovery of confidence in the economy, boosted by a fiscal stimulus, then I suspect that this talk of lower interest rates will fade. Indeed, before long I expect market participants and commentators to swing towards discussing when and by how much interest rates should be increased.
This may well cause consternation in some quarters, and it might be thought of as an awkward beginning for the new Governor of the Bank of England, Andrew Bailey. But ultra-low interest rates were introduced as an emergency measure in dire circumstances. When rates rise, this will be a clear indication that the emergency is over, and circumstances are no longer dire.
Mr Bailey should be pleased. On his watch, better times lie ahead.
Roger Bootle is chairman of Capital Economics