Brexonomics
* 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.
* Among think tanks, private sector groups and international organisations there’s a broad consensus that a no-deal exit would hit growth hard this year. But most forecasters think that even with a no deal the UK would probably skirt a serious recession, with its growth rate dropping from a lacklustre 1.4% in 2018 to around just 0.3% this year.
* At this point the consensus breaks down. Some forecasters think after the initial shock activity would bounce back in 2020. Others believe the damage would be longer lasting and would keep growth around the 0.3% mark in 2020 too. The ratings agency S&P is the most pessimistic of the forecasters we’ve seen. It thinks a no-deal Brexit would generate a “moderate recession lasting four or five quarters”.
* If the UK avoids a no-deal Brexit most forecasters think growth would hold up this year and next. The forecasts we’ve looked at imply that exiting with a deal, remaining in the EU or protracted delay under the current rules would leave the UK growing at 1.5% in 2019 and 2020, marginally above last year’s 1.4%.
* The range of conceivable outcomes for GDP growth this year, from close to zero to almost 2.0%, mirrors the range of possible Brexit outcomes. Helpfully, economists publish forecasts showing what they consider most likely to happen, as opposed what they consider could happen.
* On this front I was struck by the divergence between last weeks’ Brexit news and economists’ fairly sanguine central view on growth. Last week the publication Consensus Economics reported that, on average, the 31 economists they poll forecast the UK to grow by 1.5% this year and 1.6% next . These are not strong numbers. But against a backdrop of Brexit and an expected slowdown in the US and euro area they’re not bad either.
* The fact that average forecasts for growth are far in excess of the ‘no deal’ estimates shows that economists see a deal, a soft Brexit or no Brexit as more likely outcomes.
* Some commentators have suggested that UK equities, which are currently deeply unloved by investors who fear a chaotic Brexit, are under-priced. Believing that something is unlikely to happen is different from investing on the basis it won’t – the latter requires an altogether higher degree of conviction. Over coming weeks the path of domestically faced UK equities, the likes of retail, leisure, house-builders and the banks, will give clues as to which way investors think Brexit is going.
* All of this considers the short-term effects. But what would be the long-term impact of Britain leaving the EU?
* The UK's National Institute for of Economic and Social Research (NIESR) and HM Treasury think that long-term growth would run lower outside the EU. In NIESR’s forecasts lower migration slows workforce and GDP growth. Greater friction in trade, reduced skilled migration and lower foreign direct investment also dampen productivity.
* My sense is that whatever happens on Brexit the rapid growth of the non-UK born workforce in the last 20 years, well in excess of the UK born workforce, is unlikely to be sustained (partly because the effects of EU expansion into Central Europe were one-off, albeit a prolonged one; but also because of domestic UK politics).
* Forecasting anything in the long term is a highly speculative business. But were Brexit to mark a move to a significantly less open economy, competitiveness and growth would surely suffer. As ever, it all depends – on the deal, the response of the private sector, domestic policy and the global backdrop.
* Since the 1980s the UK has been seen as offering a stable, open, pro-business environment. The question is whether Brexit changes that, and, in doing so, pushes the UK onto a permanently lower growth path.
* Whatever happens on Brexit much will remain the same. Inside or outside the EU the challenges for the UK economy – above all how we raise productivity growth – are wearily familiar.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.7% at 6,968 as blue-chip stocks rallied on hopes of a lowering of trade tensions between the US and China.
Economics and business
* UK inflation fell to 2.1% in December, its lowest level in two years, due to lower petrol prices
* German GDP growth slowed to 1.5% in 2018, its weakest pace since 2013, but it managed to avoid a technical recession in the fourth quarter
* The president of the New York Federal Reserve warned of “headwinds” to growth from the US government shutdown which is now the longest in history
* US mortgage applications rose to a near nine-year high after mortgage rates fell on expectations of a slowdown in rate rises by the Fed
* China’s central bank injected a record Rmb570bn ($84bn) into the country’s banking system, following a series of monetary and fiscal easing measures to boost the slowing economy
* China warned Canada of “repercussions” if Ottawa were to ban Chinese tech firm Huawei from helping to build the country’s 5G network
* Germany is considering introducing security requirements which would make it almost impossible for Huawei to contribute to building its 5G network
* A top US senator on trade policy said President Trump is inclined to impose tariffs on car imports, in the hope of putting pressure on the EU to open up to US agricultural products
* EU officials said that they are prepared to lower tariffs on imported US cars in an effort to strike a trade deal, but will retaliate against any punitive measures by the US
* German carmaker Volkswagen is to invest $800m in building electric vehicles at its US factory in Tennessee
* Global policy uncertainty is at a record high due to the US-China trade war, Brexit and the US government shutdown, according to Deutsche Bank
* Investors polled by Bank of America Merrill Lynch foresee the worst outlook for the global economy since 2008 and are increasingly concerned about corporate debt
* Tesla, the electric car manufacturer, is cutting 7% of its workforce, 3,400 employees, as weak demand for its Model 3 forces it to cut costs
* The oil producers’ cartel Opec expect oil supply to outstrip demand this year, with demand for crude oil expected to fall by one1 million barrels a day compared to 2018
* The US Energy Information Administration said the US will become a consistent net oil exporter by late 2020, due to a huge increase in domestic shale production
* Microsoft pledged $500m in loans to boost affordable housing in Seattle, in response to a sharp rise in home prices, driven by increased demand for housing near its headquarters
* A House of Lords enquiry criticised the Office for National Statistics and the UK Statistics Authority for using an erroneous estimate of inflation (RPI) which consistently benefits bond holders and disadvantages students and commuters
* US President Donald Trump threatened to “devastate Turkey economically” if Turkey attacked Kurds following the US troop withdrawal from Syria
Brexit and European politics
* UK prime minister Theresa May’s Brexit deal was overwhelmingly rejected by parliament by 432 votes to 202
* The UK government survived a vote of no confidence tabled by Labour leader Jeremy Corbyn
* Mr Corbyn said he will only discuss a Brexit compromise if Theresa May rules out a no-deal Brexit
* Irish prime minister Leo Varadkar said he will not accept a time limit on the Irish border backstop after the Brexit deal was defeated in Parliament
* European Council president Donald Tusk hinted that cancelling Brexit was the only positive solution
* Annegret Kramp-Karrenbauer, the favourite to become Germany’s next chancellor, urged the UK to remain in the EU saying “our door will always remain open”
* European Commission president Jean-Claude Juncker urged the UK to “clarify its intentions as soon as possible.” Adding that “time is almost up”
* International trade secretary Liam Fox said staying in a permanent customs arrangement with the EU would “not be delivering Brexit”
* UK retailers Marks & Spencer and Tesco are stockpiling tinned food in preparation for a no-deal Brexit
* Bank of England governor Mark Carney said the rise in the pound following the Brexit vote defeat was due to markets inferring a lower chance of a no-deal Brexit
* Portugal is to create special airport corridors for the entry of British tourists after Brexit, to safeguard the country’s tourism business
And finally… Captain, a Staffordshire Bull Terrier, has been given an extravagant send off by its owner who said it deserved the same respect as any family member. Captain’s owner spent over £4,000 on a horse-drawn carriage, a dove release, and a short burial service at Willow Haven cemetery in Bedmond, Hertfordshire – puppy love