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Economic background to 11 March Budget: activity picking up

Date: 24th February 2020

Economic background to 11 March Budget: activity picking up
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest UK data, ahead of the 11 March Budget:
    • GDP was flat (QOQ) in 2019Q4, whilst growth in 2019 was 1.4%, slightly above the estimate of 1.3% for 2018.
    • Indicators suggest activity picked up after the General Election. Retail sales rose 0.9% (MOM) in January, the housing market has picked up and business surveys have firmed so far this year.
    • Despite the weak GDP number, the labour market remained robust in 2019Q4, though nominal earnings growth weakened slightly.
    • Inflationary pressures remain well contained despite the uptick in January’s CPI inflation rate.
    • Public sector borrowing has risen modestly so far this financial year (FY2019), compared with the same period in FY2018.
    Concerning Brexit developments:
    • David Frost, the UK’s chief negotiator for the upcoming UK-EU negotiations, reiterated that the UK was seeking a Canada-style FTA, without regulatory alignment, in a recent speech.
    • However, Michel Barnier, the Commission’s chief negotiator, strongly implied that the UK could not have a Canada-style trade deal in recent comments. Instead the future UK-EU relationship should be “…a trade agreement that includes, in particular, fishing and includes a level playing field.”
    • There will be a meeting of the Council of the European Union on 25 February, at which the Council is expected to approve the negotiating mandate (for the Commission) for the future UK-EU relationship. Negotiations are expected to start in early March.”
    As background to the upcoming UK-EU negotiations, it is salutary to note the importance of UK-EU trade to the UK:
    • The UK runs a large trade deficit with the EU, which acts on GDP. In 2018, a goods deficit (£94.3bn) was only partly offset by a services surplus (£27.9bn), giving a trade deficit of £66.4bn, 3% of UK GDP.
    • The share of UK exports to the EU is declining. Using conventional trade (gross) data, the share fell from around 50% in 2008 to 45% in 2018, as exports to the non-EU grew faster than to the EU.
    • Using trade in value-added (TiVA) data, which allow for the import content in exports, results in even lower shares of UK exports going to the EU. According to the DIT/OECD the share falls from 43.5% (gross data) to 37.0% (TiVA data) for 2015, whilst the US share rises from 15.7% to 17.9%.
    • The estimated ratio of exports to the EU to UK GDP, moreover, falls if TiVA data are used. The ratio for 2015 was around 12.0% using gross data, but it fell to less than 9% using TiVA data.
    UK political update:
    • There was a cabinet reshuffle on 13 February. Rishi Sunak replaced Sajid Javid as Chancellor of the Exchequer.
    • The Government announced a new Points-Based Immigration System on 19 February 2020, which will become operative on 1 January 2021.

    Ruth Lea said, “Granted the economy ended 2019 on a subdued note, but there are now increasing signs that, in the wake of the General Election, it is returning to growth. There is, therefore, no obvious need for a major fiscal boost in the Budget to ‘get the economy going’. Moreover, given de facto full employment, any such boost would risk over heating the economy as well as jeopardising fiscal prudence.”

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Press enquiries:

Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
Follow Ruth on Twitter @RuthLeaEcon

Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151