UK – Life after Brexit

Key points

  • The General Election on 12 December will determine the path of Brexit. We expect a small Conservative majority, which will deliver Brexit on 31 January 2020.
  • Growth in 2020 will reflect a trade-off between economic uncertainties and degrees of fiscal easing in a range of scenarios. We expect GDP growth of 1.2%.
  • By 2021, UK growth should re-engage with global trends. There is a risk this will come at a time of renewed global softening, dashing hopes for a post-

Election outcome governs the short-term

The immediate outlook for the UK remains tied to the path of Brexit and the result of the 12 December General Election will be critical. At the time of writing, the Conservative Party has a solid lead in the polls and Prime Minister Boris Johnson is substantially ahead of Labour leader Jeremy Corbyn. What’s more, the Brexit Party has pulled out of contesting the 317 seats that the Tories took in 2017 to avoid splitting the leave vote. We expect the Conservatives to win the election by a small majority. This should allow passage of the Withdrawal Agreement Bill and deliver Brexit on 31 January.

Such an outcome would move the Brexit process along, it  would not “get Brexit done” – as Johnson has promised - removing it from business considerations. Brexit’s main impact has been to raise uncertainty and hobble business investment. Passing the Bill should reduce that uncertainty, but the Tories now suggest not extending the transition phase beyond 2020. This risks the UK leaving current (EU) trading arrangements in 2021 without a replacement agreement, reverting to World Trade Organization trade terms with the EU – significantly increasing trade barriers. This commitment is likely political and should reverse next year. However, its effect will be to keep uncertainty high and squander the prospect of a business investment recovery.

Material pledges of fiscal easing should offset some of this ongoing uncertainty, with the Tories proposing a new, long-term fiscal rule to balance government spending excluding investment, subject to limits on investment and debt interest spending. This should see an easing in the fiscal stance of around 0.7% of GDP in 2020-21, with modest further easing in subsequent years. The net effect should be to underpin quarterly growth in 2020, quickening to 0.4%, from a 0.25% expected average in 2019. Annual GDP growth would remain subdued at 1.2% in 2020, from an estimated 1.3% in 2019.

Different electoral paths are possible. The most contrasting would be a Labour-led Parliament. This would lead to a second referendum - which could deliver a closer post-Brexit trading arrangement, or revoke Brexit altogether. This more business-friendly Brexit outlook would, however, be overshadowed by Labour’s broader radical economic agenda, presenting business with fresh uncertainty. Admittedly, Labour’s fiscal programme would provide a significant boost to GDP, replacing private with public investment. We forecast this would see similar growth in 2020, marginally faster expansion in 2021[1]. Exhibit 1 considers different scenarios.  

Exhibit 1: GDP outlook highly dependent on election result

Source: ONS, AXA IM Research, Nov 19. NB HP=Hung Parliament

As Brexit begins to diminish in importance, trends in global growth will reassert their predominance for the UK outlook. Global activity should start 2020 on a firmer footing, with trade tensions receding somewhat. However, our longer-term outlook sees renewed weakening in US activity, further slowing in China, and a continued softening in Eurozone growth in 2021. The UK’s tentative pick-up - underpinned by easier fiscal policy - should allow UK outperformance of other developed economies in 2021. But we still see quarterly growth stalling, resulting in slower annual growth of 1%.   

Monetary policy will hinge on the shifts in the economic outlook. Quicker growth in 2020 would reduce the downside risks that the Bank of England (BoE) has indicated could require “further [policy] support”. However, any period when the Bank is likely to consider withdrawing policy stimulus will probably be curtailed by renewed signs of global weakening. We forecast the BoE to leave the Bank Rate unchanged at 0.75% across 2020, but we expect global slowing to see the rate cut back to 0.25% in 2021.

[1] Page, D and Kerr, A, “UK faces Brexit-fuelled General Election – what happens next?”, AXA IM Research, 14 Nov 2019.

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