- 2020 will be more a year of growth consolidation rather than a full fledged recovery. The world economy is on shaky foundations and it is critical to appreciate the dangers of the many risks still in play.
- Despite expecting a Brexit deal and some recovery in the global economy in 2020, we do not see the data turning around quickly enough to prevent a one-off rate cut from the BoE.
- We see a modest recovery in underlying growth and inflation, but with both remaining below trend/target we see the ECB lowering its depo rate once more in early 2020.
The UK: New year, New Brexit?
2019 seemed to be the year of parliamentary battles, with the UK's Prime Minister Boris Johnson finishing the year on a high and gaining the parliamentary majority which he desperately needed to 'Get Brexit Done'.
This year Parliament is set to be less of a market moving issue, it will be more around how the UK plans to get a free trade agreement across the line with the EU.
Elsewhere in the UK we are seeing slowing growth, falling inflation and cracks in the labour market that we think will lead to the Bank of England to cut interest rates.
The UK will exit the EU at the end of January 2020, after which it will embark on a free trade deal with the EU which it hopes to complete – somewhat ambitiously – by the end of next year. The markets’ focus will now shift to the risk of a hard Brexit (or, more accurately, a hard exit of the transition phase) – if a trade deal with the EU is not forthcoming.
Euro area: Below trend, below target
At the end of 2019 we were talking about the encouraging news that two of the bigger global risks – the US/China trade spat and a hard Brexit – had gone some way to being resolved and we were expecting euro area growth to recover rapidly. However, lingering uncertainty and a more prolonged global demand slowdown have prevented the economy from making a comeback.
Of course there are problems – a short term US/China deal does not imply a long-term solution, and the risk of a cliff-edge at the end of the Brexit transition phase remains. And just as these two risks are being addressed a new threat comes hurtling along with US/Iranian tensions escalating and oil prices rising as a result. If sustained, this could mean central banks having to grapple with an unpalatable mix of energy-price-induced rises in inflation and additional geopolitical uncertainty leading to slower growth.
Euro area surveys have stabilised, supporting our view of a slow recovery and rising inflation. The auto industry is facing ongoing challenges, while services are proving more resilient. After delivering Brexit, the focus will likely turn to the UK government’s negotiations with the EU and political uncertainty potentially returning as deadlines draw close. We see growth picking up in 2020 to around 1.75%, after near-term weakness, and inflation falling in 2020. We see a BoE rate cut at the end of January, but only as an interim measure before hikes are back in vogue.
For more information please see our full 2020 Global Outlook.
Chief UK & Euro Area Economist