Richard North, 04/01/2020  
 


There is some debate as to whether the collective noun for economists should be a deficit or a recession. Either way, it is accepted amongst the cynically inclined that, when the collective gets together to pronounce on any one issue, it will usually be wrong.

On the other hand, there is that ever-present tendency to embrace information or predictions which conform with one's expectations or prejudices. So, if the "deficit" or "recession" happens to suggest something with which one might agree, then the cynicism can melt away and what it has to say suddenly becomes the very essence of accuracy.

With that in mind, one takes note of the annual survey from the Financial Times of more than 85 "leading economists", on their expectations for the economy for the coming year.

From polling in the week following 12 December, this is one of those fillers adopted by the legacy media in that period when everyone is short of news -although this time it just happens to coincide with the rest of the media expressing fears of an outbreak of World War Three after the assassination of Qassim Soleimani.

Should there still be anything left to worry about in the next few months, and Tehran hasn't been turned into a glass-coated car park, we can address the concerns of this economist collective, which is taking the view that any bounce that the UK economy received from Johnson election victory will swiftly fizzle out in 2020 as the uncertainties from Brexit continue to curb business investment.

The vast majority of the economists polled predict that there will be be "little or no improvement in economic growth this year" as chronically weak productivity persists and Britain's future trading relationship with the EU remains unknown.

This is despite (or perhaps because of) Johnson's upbeat New Year message, where more than a third of respondents believe GDP growth in 2020 will be no better than in 2019, which looks likely to be the worst performance in a decade. A similar proportion thinks growth would improve only slightly, even with the prospect of a boost from higher public spending.

John Philpott, director of consultancy, The Jobs Economist offers some suitably black humour to go with the gloom, stating that: "Rather than a bounce, the economy will experience something more akin to a jump by someone wearing lead boots".

Others are more direct, if somewhat pedestrian, saying that a post-election rebound was likely to be "small", "temporary", "disappointing", "limited", "imperceptible" or "negligible".

These gloomy prognoses, we are told, are partly due to Johnson's determination to end the transition period early and his apparent preference for a "bare-bones" trade deal. That has prompted the "overwhelming majority" of respondents to warn that, even after the UK had formally left the EU, there could be no lasting recovery until a trade deal was in place.

Another of the naysayers is Diane Coyle, professor of public policy at the University of Cambridge. Of Johnson, she says that he has "just recreated a cliff-edge, no-deal Brexit since the election". Yael Selfin, chief economist at KPMG, says: "The markets have already woken up to the fact that the risk of a no-deal cliff-hanger is still with us. The cloud of uncertainty…?will keep business investment at bay for a large part of this year".

The FT suggests that the year could follow the same pattern as 2019, when consumer spending could offset the slump in business investment - with strong employment, steady wage growth and low inflation helping household finances.

However, a majority of the survey respondents said they did not expect households to feel any better off at the end of 2020. Several questioned whether the recent improvement in real earnings would last, given the UK's poor productivity and recent volatility in the labour market.

Virtually none of those surveyed expected any big change in interest rates by the Bank of England. So if the economy slows to the point where stimulus is needed, this means the UK’s fortunes in 2020 and beyond will depend in large part on how far the chancellor increases spending. "Looser fiscal policy will ultimately determine how well the economy does over the next couple of years", says Paul Dales at the consultancy Capital Economics.

Taking all this into account, the FT recognises that the picture painted by many survey respondents - of weak business investment, steady but unremarkable consumer spending and flatlining productivity - suggests that Johnson's command of parliament is unlikely to unleash the "new wave of economic growth" he has promised.

This leads Rain Newton-Smith, chief economist at the CBI to state the obvious: "A strong parliamentary majority", he says, "makes it easier to get things done but uncertainty over Brexit will lift only gradually". David Miles, professor at Imperial College London, takes a more optimistic line, declaring that the bounce "could become substantial if trade talks with the EU seem to be going well".

Therein lies the rub. We can expect government propaganda to be ramped up to its highest intensity any settlement spun to give the best possible construction. City sentiment, bolstered by media reports, may well trigger short-term optimism.

But the FT tells us that others have predicted that 2020 would be the year in which the longer-term costs of Brexit became apparent. It has Mark Gregory, chief economist at EY, predicting that the UK would increasingly be "viewed as a market to sell to, not a part of integrated European supply chains". Tony Yates, senior adviser at Fathom Consulting, sees "a slow ebbing of activity away from the UK and towards trading partners".

Peter Westaway, chief economist at Vanguard, describes the version of Brexit we are likely to experience as "like a chronic illness, persistently negative". Professor Ray Barrell, at Brunel University, expects the economy to be between two and six percent smaller in ten years than it would otherwise have been, comparing Johnson's deal with that of his predecessor Theresa May. "The downward glide path starts in 2020", he warns.

And there the cynicism does indeed melt away. This is entirely in accord with my expectations of a slow-motion loss of business to the EU Member States and a gradual fall in GDP and economic activity declines.

Take away the blind optimism of Johnson and his sorry crew and all we are left with is the reality. A possible early indicator of this is the recent performance of sterling, which is on track for its biggest daily loss in two weeks.

This is attributed to the falling away of the euphoria after the election, reflecting worries over the current trade negotiations. And, while nothing can be taken from short-term currency fluctuations, the current behaviour is entirely in line with the expectations of the economists' collective.

If there was any confirmation needed, the purchasing managers' index for manufacturing is also contributing to the gloom, showing factory output falling in December at the fastest rate since 2012, while the construction sector has seen sharp falls and civil engineering had suffered it lowest activity since March 2009.

And all of this makes absolute sense. If trade agreements are so sought after because they enhance economic activity, then it stands to reason that reversing the process must trigger a deterioration in our economic position. Thus, given the current political situation, it would be irrational for economic indicators to be pointing the way to sunlit uplands.

Johnson is embarked upon a course of action which, in the short-term, cannot possibly deliver economic gains. If, as he avers, the 2020s are to be "a decade of prosperity and opportunity", then the decade will be off to a very slow start and there will be a lot of catching up to do.






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