Economists’ expectations for Britain in 2019 are in, and they don’t look good.
A survey carried by the Financial Times in the first week of January found that leading economists expect Brexit uncertainties to cripple business investment and consumer sentiment over the next year. Wage growth, productivity and all the usual growth engines are therefore likely to be subdued.
It’s fairly common these days to say economists ‘got it wrong’ before on Brexit, predicting a Brexit-induced downturn after the referendum that failed to materialise.
While the extent to which that’s true is debatable, what seems to have flown under the radar is that forecasters actually got it very right last year.
Experts polled a year ago predicted GDP growth of 1.5 per cent in the UK, along with a drop-off in inflation and a rise in wages. All those things came to pass.
However when asked this year, most respondents declined to offer any actual numbers, given the “chronic” uncertainty surrounding Brexit negotiations.
What they did say is Britain’s 2019 prospects come in 50 shades of… not good.
According to one Cambridge professor: “The outlook is anything from lacklustre to catastrophic, but who knows?” Those that did venture some numbers mostly predict a repeat of last year’s 1.5 per cent growth or thereabouts.
Where does that leave us? At the end of 2018 we expected some upside in UK assets, which have been so badly beaten by investors that anything better than the apocalypse will be a positive surprise. So, are we expecting a much better 2019 for Britain’s economy than others?
Not exactly. Most of the survey opinions seem true enough.
The government has found it difficult to even set a date for a parliamentary Brexit vote, let alone win one. What defeat or further postponement could mean as we head ever closer towards the March divorce date is anyone’s guess.
This prevents business investment and could encourage consumers to save any wage increases that come their way, removing a vital stimulus from the economy.
Many businesses are already drawing up plans for moving abroad. Even in the event of arguably the least disruptive outcome (no Brexit), the government’s brinkmanship could have a lasting impact on growth prospects.
The end may not be nigh
The reason we’re relatively positive on UK assets despite this negativity is they are currently trading at values below what even the most dour Brexit outcomes would justify. Mild, barely positive growth this year wouldn’t be good, but it would be much better than what is currently priced in by capital markets.
Current valuations seem to be pricing in an unrealistic drop-off in activity. Just like with global markets, we think this is more to do with the increase in risk premium (the amount investors expect to be paid for tolerating a certain level of risk) than actual recession expectations.
This means once investors realise Britain hasn’t fallen off a cliff, there’s a good chance asset values will rebound, adjusting to lower – but not catastrophic – economic levels. Even if Brexit ends up being harder than we at Tatton expect, there could still be enough of a rebound to bring confidence back into markets.
Besides, there are silver linings to the Brexit cloud too.
Uncertainty has been the biggest thing holding back business investment for the past two years, but sooner or later this uncertainty will have to fade.
So, anything other than a crash Brexit (that is, a disorderly no deal without giving businesses time to prepare) is likely to see business investment increase – if for no other reason than it can’t get much lower.
And, even though it would bring more short-term uncertainty, perhaps from a possible second referendum, a soft Brexit or even no Brexit seems entirely possible at this point.
Even in the event of a positive surprise, however, not all assets are likely to see the same rebound.
Companies with large overseas revenues are likely to be stable or better, particularly if sterling weakness continues and even if domestic demand drops off. The same is true for exporters and especially manufacturers, who have benefited greatly from sterling’s weak value since the referendum.
Domestic-focused companies could come under more pressure. This will be the case at least until consumer spending rebounds, which could take a while even if we get some Brexit positivity.
That brings us to retailers, who have been having a difficult time in recent years and are unlikely to see a change of fortunes.
Retailers’ issues go far beyond Brexit; they are cyclical and even structural. Even improvements in the Brexit outlook are unlikely to help them too much.
We suspect the same is true for the property market. We have written in the past that there are structural issues holding down property prices that aren’t Brexit-related but to do with stretched affordability and wealth inequality.
Brexit outcomes will make little difference to these underlying issues, though they could well worsen the effects.
But while there are pockets where low asset prices are justified, in general, prices have fallen below what could be reasonably expected given the range of Brexit outcomes.
Of course, downside risks do remain, and as we see it are largely centred around employment. Unemployment has so far remained low in spite of Brexit uncertainties, but if that changes significantly it could be particularly bad.
If not, we expect a lacklustre performance from the UK economy this year, but perhaps a better one from UK asset markets.