Stronger economic growth forecast for 2020
THE outlook for the UK economy has improved over the last three months, with the decisive nature of the General Election result and the subsequent clarity on the first stage of Brexit expected to provide a short-term boost, according to the EY Item Club’s Winter Forecast.
It has increased its projection for GDP growth to 1.2 per cent in 2020 and 1.7 per cent in 2021, compared with the one per cent and 1.5 per cent predicted in its last quarterly forecast.
The predicted growth for 2020 is slightly lower than the estimated outturn of 1.3 per cent in 2019. However, EY Item Club expects UK GDP expansion to improve from 0.8 per cent in the fourth quarter of 2019 to 1.6 per cent in the fourth quarter of this year.
According to the forecast, the UK economy is likely to show signs of improvement in the early months of 2020 but may struggle to “kick on” as the year progresses owing to uncertainty around the EU and UK’s longer-term relationship.
The UK economy is expected to see stronger growth in 2021 as a result of reduced uncertainties, fiscal stimulus, a healthier labour market and a brighter global economic environment. This is based on the assumption that the UK and EU reach some form of free trade arrangement by the end of 2020, or end up extending the transition agreement.
Suzanne Robinson, managing partner for EY in Leeds, said: “There may be some improvements in the economy and while we have some clarity, there are still significant unknowns – about the trade deal around Brexit and the wider policy agenda of Government.
“EY has been championing economic rebalancing and sustained investment into the Northern regions for the past few years. It is therefore encouraging to see the Government indicate that it will be aiming to use the Budget to boost investment in infrastructure and help ‘level up’ the economic growth experienced by core cities, such as Leeds.”
The EY Item Club forecast assumes that interest rates will remain on hold until around mid2021, although it acknowledges that the Monetary Policy Committee’s decision on Thursday
SUZANNE ROBINSON: Still significant unknowns despite clarity provided by election result.
looks to be on a knife edge and is very hard to call.
The EY Item Club has urged caution on monetary policy and believes that interest rates should remain at 0.75 per cent this month given that the economy looks well-positioned to pick up early on this year, fiscal stimulus is on the way and the labour market also looks strong.
It said the near-term outlook for the UK economy has improved with the reduced uncertainties following the decisive General Election result likely to trigger some business investment and projects that had been delayed during 2019.
Consumers may also be more prepared to step up their discretionary spending. Meanwhile,
further fiscal stimulus is expected in the Chancellor’s Budget on March 11. This follows the sharply increased public expenditure of 4.1 per cent in real terms for 2020-21, announced in the September 2019 spending review.
The EY Item Club believes that the Bank of England can justifiably remain in “wait and see” mode, despite recent indications from some MPC members that they may act quickly on interest rates if there are no signs of immediate improvement in the economy.
It said the robust latest labour market data – with employment jumping 208,000 in the three months to November – reinforces the EY Item Club’s view that the Bank of England should hold fire for now at least on interest rates.