Economic update: A steady start to 2019

Daniel Harari

The UK economy continues to grow at a steady if relatively
modest pace. Brexit uncertainties have led to falling business investment, while
rising consumer spending has underpinned GDP growth. The global economy has
slowed over the past year, with a number of risks clouding the outlook.
Meanwhile, the Government’s budget deficit of 1.2% in 2018/19 was the lowest
since 2001/02.

GDP growth remained steady in early 2019…

After slowing towards the end of last year, economic growth
has stabilised in the first few months of 2019. GDP in the three months to
February rose by 0.3% compared with the previous three months. This was the
same as in the three-month period ending in January.

Growth came mostly from the services sector, with the Office for National Statistics (ONS) highlighting, “a continued strong performance in IT.” It also noted that manufacturing had recovered after a weak end to last year, with output in the sector rising by 0.4% compared with the previous three months.

A bar graph showing GDP growth from 2017 to the beginning of 2019

Compared with the same three-month period a year before,
GDP growth was 1.6% in the three months to February. It has hovered around 1.5%
since early 2018.

…as consumers continue to spend

Looking ahead, uncertainty looks set to continue with the
UK and EU agreeing to delay Brexit. Most economists think the declines in
business investment – declining in each quarter of 2018 – are linked to uncertainty
over the Brexit process.

Consumers, on the other hand, have continued to spend. Despite high-profile difficulties of some high-street stores, official retail sales data from the ONS have been robust so far this year: sales volumes were up 5.0% in the three months to March compared with a year ago. Consumer spending has been supported by average real (inflation-adjusted) earnings rising by 1.5% on an annual basis, the highest it’s been since late 2016.

Global economic risks rise

In 2017, the world economy experienced its strongest year
since the 2008/2009 global financial crisis. During 2018, however, a number of
factors resulted in a slowdown. These included a ratchetting up of trade
tensions, most importantly between the US and China, weaker Chinese and
European growth, and global financial conditions tightening as the US raised
interest rates.

Some of these concerns have diminished in early 2019. For
instance, the Chinese economy seems to have picked up some strength and
financial conditions have eased. Nevertheless, the world economy is at a ‘delicate
moment’ according
to the IMF in its recent assessment.. Slower world trade growth
remains a concern, as does weak European growth. In addition, the US economy
could experience a slowdown after a strong expansion in 2018 as the impact of
tax cuts fades. The continued reliance on credit to fuel Chinese growth is also
concerning to a number of
economists, who worry about elevated debt levels in the economy.

The consensus appears to be that the world economic growth
remains on track to improve somewhat over the course of 2019. However, as
mentioned, there are several potential shocks that could derail this benign
scenario.

Government budget deficit falls to lowest in 17 years

Turning back to the UK, the Government budget deficit in 2018/19 was the lowest recorded in 17 years. The Government borrowed the equivalent of 1.2% of GDP (£24.7 billion) in 2018/19 to make up the difference between what it spent and what it received in revenues. This was the lowest since a deficit of 0.4% in 2001/02 and down from a peak of 9.9% in 2009/10 following the financial crisis.

While the amount the Government borrows on an annual basis has come down, its debt – broadly speaking the stock of past borrowing – remains high. Public sector net debt at the end of 2018/19 was equivalent to 83% of GDP, compared with the pre-financial crisis debt level equivalent to 35% of GDP in 2007/08.