Economic update: Optimism on the up

As the new Chancellor prepares to give his first Budget, he
will be looking at an economy that appears to be on the up, with business and
consumer optimism increasing and a recovery in retail sales. However, he will
also have to contend with a weaker situation than hoped for in the public
finances, and stubbornly low economic growth.

Uncertainty gives way to optimism

Services and manufacturing

Purchasing managers in both the services and manufacturing industries predicted better overall performance than in recent months. IHS Markit’s Purchasing Managers’ Index for services (which measures business performance) has risen sharply to its highest level in over a year. This may reflect a continuing bounce back from the uncertainty before December’s election, as industries start work on orders that were previously delayed.

Business confidence was also up according to the
Confederation of British Industry (CBI). Its monthly Industrial Trends Survey showed
that more
manufacturers expect output to grow rather than shrink, over the next three
months. A higher proportion of manufacturers are expecting growth than at any
point since January 2019.

Retail

Retail sales also recovered slightly, with sales volumes in
January up 0.9% on the previous month and up 0.8% on a year before. However,
this follows a very weak year for the sector, and it is not yet clear whether
the new figures represent the start of a sustained recovery.

Economic growth remains at a low ebb

While optimism may be increasing, we don’t yet have enough data to know if it will bring actual growth. The economy stayed flat in the last quarter of 2019, with no growth compared to the previous quarter. Forecasts for growth are also yet to take off, with the Treasury’s survey of independent forecasts showing an average forecast of 1.2% growth in 2020 (for context, actual growth in 2019 was 1.4%).

Monthly GDP figures (which are more volatile than the
quarterly ones) showed growth of 0.3% in December, an improvement on the 0.3%
contraction in the previous month. February’s bad weather and the potential impact
of the COVID-19 coronavirus (which may disrupt supply chains) mean that
economic growth may continue to struggle, at least in the short term.

The labour market continues to be strong however; average earnings finally exceeding their pre-financial crisis levels. Employment also remains at a near-record high, with unemployment at a near-record low.

Higher borrowing leaves less room for manoeuvre

Aside from the weakness in growth, the Chancellor will also
have to contend with a less promising position in the public finances than he
would have liked. Although there was a public sector surplus in January (as
there normally is, because this is when most self-assessed income tax is
received), this surplus was £2.1 billion lower than in January 2019.

The Office for Budget Responsibility (OBR) expects that total borrowing for the 2020/21 financial year will be above the £38.4 billion of the previous year, a far cry from the £10 billion surplus forecast by the OBR back in March 2016.

Further reading

The UK economy: A dashboard, House of Commons Library.

About the author: Philip Brien is a researcher specialising in public spending at the House of Commons Library.