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With Brexit uncertainty undimmed we start this week’s Briefing with a short recap on the economics of leaving the EU.
The consensus among economists is that the UK will grow by 1.3% this year and 1.5% next year. With activity slowing across the world, particularly in the euro area, and the UK scheduled to leave the EU, growth at these rates looks pretty respectable. Given the uncertainties facing the UK it’s perhaps surprising that its economy is expected to outpace Italy’s or Germany’s this year.
This fairly cheery outlook for the UK comes with a major caveat. Most forecasts are predicated on the UK leaving the EU in an orderly, managed fashion. In the event of an abrupt departure without a deal UK growth forecasts would almost certainly plummet. Leaving the EU without a deal would, according to the OECD and the National Institute of Economic and Social Research, leave the UK growing by around 0.4% this year and next.
We were taken by surprise last week by the scale of the downgrade to the OECD’s latest forecast for German growth. The OECD now thinks that the German economy will grow by just 0.7% in 2019. This is a big reversal of fortune; a year ago the thinking among economists was that Germany would grow by around 2.0%. At 0.7% German growth would be slower than the euro area as a whole (1.0%) and even the Brexit-embattled UK (0.8%).
Last October the International Monetary Fund warned of the risk of another global financial crisis. The Fund sees a 60% rise in global indebtedness in the last ten years and the exposure of banks to illiquid assets as major risks.
2018 was a tough year for British retailers. According to the Centre for Retail Research, nearly 2,600 stores closed, the highest number since 2012. Recent high-profile casualties included HMV, Patisserie Valerie and Oddbins. Along with the structural shift to online shopping, high-street retailers are under pressure from a slowdown in consumer spending growth.
After a dreadful end to the year global equity markets got off to a flying start in 2019. The US S&P 500 index is up by 10% so far this year, having fallen by 16% in the first three weeks of December.
The financial crisis of 2008-09 pitched Western economies on to a lower growth path. In recent years growth across the industrialised world has run well below the rates seen in the years before the financial crisis.
The latest Deloitte survey of UK Chief Financial Officers released today shows that uncertainty over Brexit is driving a marked shift towards defensive strategies among British businesses. With the UK’s growth prospects heavily dependent on the so far uncertain nature of its exit from the EU, corporates are cutting back on capital expenditure and hiring. Cost reduction is the top priority for CFOs who are placing a greater emphasis on it now than at any time in the last nine years.
A boom in low quality mortgage lending in America triggered the Global Financial Crisis. It was a crisis of indebtedness which, courtesy of low interest rates, quantitative easing, government spending and bank bailouts, was resolved by the accumulation of even more debt.
Amid the legion of uncertainties surrounding Brexit is there much that can be said with some degree of confidence? Economic forecasts are hardly renowned for their accuracy, but they provide a starting point for thinking about the potential economic effects of Brexit.
Last year was a tough one for investors, with global equity markets falling 10% overall. For UK investors most major asset classes – equities, bonds and residential property – either fell in value or saw only small gains.
Here is a choice selection of the "and finally" news stories from the Monday Briefing in 2018. The Monday Briefing is taking a break until Monday 14th January. In the meantime the Deloitte economics team - Ian, Debo and Tom - wish you a merry Christmas and a happy New Year.