CBI Economic Summary

• The CBI’s latest UK economic forecast expects growth to remain subdued through 2020, assuming the EU Withdrawal Agreement is ratified by parliament.

• The CBI’s latest growth indicator points to slightly weaker growth in Q4 following a stronger Q3, which was supported by the warm weather and world cup.

• Evidence of stockpiling by companies as a form of contingency planning for Brexit remains limited.

• The latest Financial Stability Report concluded that UK banks are resilient to a sharp recession in the UK and global economy, more severe than the global financial crisis.

• Several major papers analysing certain Brexit scenarios were released at the end of November ahead of Parliament’s vote on the EU Withdrawal Agreement bill.

 

 

CBI Economic Narrative

• • Underlying growth has largely evolved as we had expected during 2018, at a slow and underwhelming pace (averaging 0.4% per quarter since the EU referendum). We expect similar growth to persist ahead, with the economy expected to grow by 1.3% in 2018 and 1.4% in 2019 – broadly unchanged from our previous forecast (1.4% and 1.3% respectively). We expect growth to pick up a little further in 2020 (to 1.6%), but to remain below pre-crisis norms (GDP growth averaged 2.9% between 1997-2007).
  • Key assumptions in our forecast include:
    • Household spending remains subdued, with real incomes growth staying weak. Consumer spending growth picks up somewhat over 2020 as real earnings recover, though both remain below their pre-crisis averages.
    • Brexit uncertainty – including uncertainty around the full end-state of the UK’s relationship with the EU – continues to weigh on business investment. We expect some firming in growth towards the end of our forecast period, as uncertainty lifts and the impact of greater automation spending kicks in.
    • Support to growth from net trade peters out over our forecast. While solid global growth continues to support exports, this is largely matched by a mild pick-up in imports growth, supported by a firming in domestic demand.
    • We also now expect a little more support from government spending, following announcements around increased spending on the NHS.
  • Our forecast is conditioned on the Withdrawal Agreement being ratified – particularly the implementation of a transition period until at least the end of 2020 – thus ensuring a smooth transition to a new relationship with the EU.

• The prospect of a “no deal” remains the most immediate risk to the UK economy, and would likely lead to both greater financial market volatility and significantly weaker economic growth than in our baseline forecast. GDP growth would likely be more volatile in the near-term too, particularly if firms turn to stockpiling in the event of a no deal.

 

• The global economy continues to expand at a decent pace, although the pace of expansion has slowed since the start of 2018. This reflects a combination of factors, such as the maturing of the economic cycle in key markets (such as China), higher oil prices, tighter global financial conditions, and the impact of rising trade tensions on business confidence. Nevertheless, the slowdown in global growth is expected to be gradual and the global economy is still expected to expand at a relatively healthy 3.7% in 2018, 3.4% in 2019 and 3.5% in 2020.

 

There has been some volatility in economic growth over 2018 so far, largely driven by the weather: the “Beast from the East” caused the economy to near-flatline in Q1, while the warmer-than-usual summer provided a bigger lift to activity in Q3. But looking through this volatility, underlying growth has largely evolved as we had expected, at a slow and underwhelming pace (averaging 0.4% per quarter since the EU referendum).

The latest CBI economic forecast (released 6 December) expects the UK economy to grow by 1.3% in 2018 and 1.4% in 2019, broadly unchanged from the June 2018 forecast (of 1.4% and 1.3%, respectively). The forecast sees growth picking up a little further in 2020 (to 1.6%), while remaining well below pre-crisis norms (GDP growth averaged 2.9% between 1997 and 2007).

The forecast is conditioned on the successful ratification of the EU Withdrawal Agreement, including a transition period until at least the end of 2020, with the UK than moving towards a relatively close relationship with the EU. Under this scenario (see below for discussion of recent Brexit impact studies), domestic demand is set to remain subdued – although it picks up slightly as the squeeze on household earnings eases and government spending increases – and business investment is expected to improve as Brexit uncertainty fades. Meanwhile, net trade is expected to support the economy to a lesser extent, due to the boost from the low pound having peaked and firmer domestic demand pushing imports growth higher.

Q4 starts off on a more subdued pace…

The November CBI Growth Indicator showed that private sector activity was steady in the three months to November, its weakest pace since March 2016. The slowdown was driven by a weaker performance in services and slower growth in distribution – retailers saw sales volumes fall in the three months to November. Meanwhile, manufacturing growth picked up slightly, but remained below the stronger readings seen earlier this year.

The weaker growth momentum in the Growth Indicator chimes with the decline in the November IHS Markit/CIPS UK composite PMI, which fell to 50.7 in November from 52.1 in October, indicating barely any growth on the month. The drop in the composite PMI was driven by a larger-than-expected drop in the services PMI – which hit its lowest level since the EU referendum – that offset a rise in the manufacturing PMI. According to Markit, the composite PMIs in October and November would be consistent with quarterly GDP growth of around 0.1% in Q4 2018, a sharp slowdown from 0.6% growth in Q3.

…. as underlying conditions remain gloomy

The CBI’s latest quarterly surveys on the services and retail sectors suggested that business conditions in the UK are noticeably lacklustre. The services sector saw profitability fall, while business sentiment deteriorated at its fastest pace since November 2016. Meanwhile, the retail sector recorded poor business sentiment, flat investment intentions, and declining headcounts. The November Services PMI chimed with this gloomy outlook. Markit mentioned that Brexit uncertainty was the main factor behind the fall in the services PMI, citing businesses and customers cancelling/postponing spending and investment decisions amidst the political turmoil.

Labour market remains tight, as pay growth improves

The UK labour market remained extremely tight in the three months to September, with the unemployment rate (4.1%) around its lowest since the mid-1970s (albeit edging higher on recent months). Encouragingly, pay growth continues to show signs of life, with average regular weekly earnings growth (excluding bonuses) picking up in the three months to September (3.2%). However, once inflation is taken into account, real pay growth remains modest and below pre-crisis norms.

Evidence of contingency stockpiling remains limited

There have been several high-profile reports in the media about businesses stockpiling, as part of Brexit contingency planning – particularly in preparation for supply chain disruption in the event of a “no deal”. Generally, some CBI members do talk about stockpiling as part of their Brexit preparations – particularly in food & drink manufacturing, chemicals and pharmaceuticals. Some of these sectors are stockpiling (at least in part) as a response to guidance in the government’s technical notes.

Overall, though, evidence of stockpiling remains limited. The CBI’s business survey data on stock adequacy in the retail and manufacturing sectors remain around or below their long-run averages. Many CBI members explicitly talk about not building up stocks because of the practical difficulties in doing so (for example, in the case of perishable food). Of those businesses that reported that they are stockpiling, a number of them are only stockpiling enough for a short period (e.g. a few weeks).

Inventories are a direct component of GDP, so stockpiling would, in theory, boost growth over the near-term; however, one would expect stockpiling to drag on growth into the medium term as companies subsequently ran down stocks. The CBI forecast does not assume any further near-term boost to GDP from stockpiling due to limited supportive evidence from CBI members and the CBI’s business surveys. One should note, though, the degree of support to near-term growth from stockpiling is very difficult to gauge, as that it is typically a very volatile driver of growth. Therefore, it remains an upside risk to our near-term growth forecasts.

FPC judges that UK banks are prepared to withstand a severe, global recession

In the Bank of England’s latest Financial Stability Report, the Financial Policy Committee (FPC) judged that the UK banking system could withstand a deep, simultaneous recession in the UK and global economy that is more severe than the global financial crisis. Despite the dramatic, worst-case scenario tested in the Bank of England’s annual stress test, UK banks would be able to maintain a capital ratio (following the scenario) twice as large as before the financial crisis.

Additionally, the FPC judged that the negative impact of a disorderly Brexit on UK banks’ capital would likely be “limited”. This is partly due to the geographic diversification of major UK banks, with only around half of their exposure being to the UK. This means that UK banks would be able to balance losses incurred in the UK through their considerable exposure to foreign markets. The FPC noted a risk in the form of a sharp rise in corporate non-bank finance globally, particularly in the form of leveraged loans. Additionally, the FPC noted that current global debt vulnerabilities – specifically stemming from emerging markets, China, and Italy – pose a considerable risk to the UK banking system.

Several Brexit scenario papers have been published

Four significant pieces of analysis on the impact of Brexit were released on the week of 26 November (in chronological order of release):

• • NIESR: The economic effects of the government’s proposed Brexit deal

• Centre for Economic Performance (CEP) and UK in a Changing Europe: The economic consequences of the Brexit deal

 

• HMG: EU Exit: Long-term economic analysis
• Bank of England: EU withdrawal scenarios and monetary and financial stability: A response to the House of Commons Treasury Committee

 

The first three pieces of analysis looked at the long-term economic impacts of Brexit (i.e. the impact in 2030 or beyond) under various assumptions about the form that Brexit might take. The government paper was the most detailed of these three, including analyses of sectoral and regional impacts. Meanwhile, the Bank of England’s paper looked at the economic impact of different Brexit scenarios in the short-term (through to 2023). The results of the different papers can be found in the chart below.

 

EU citizens’ rights-DEFRA  Announcement: As you will be aware, the Government has agreed in principle the terms of the UK’s smooth and orderly exit from the EU, as set out in the Withdrawal Agreement. However, it is the duty of any responsible government to prepare for all scenarios, including the event that we leave the EU in March 2019 without a deal.

On Thursday 6 December the Government set out provisions for EU citizens and their family members in the UK in the event of a no deal outcome. You can read the full policy document here.

The information confirms that:

• In the event of a no deal, the EU Settlement Scheme will continue to be implemented, enabling EU citizens and their family members living in the UK by 29 March 2019 to secure their status and continue to be able to work, study, and access benefits and services in the UK on the same basis after we exit the EU as they do now. The scheme will be fully open by 30 March 2019 as planned.
• The Home Office will continue to look to grant status to applicants rather than look for reasons to refuse their application. For example, as per the UK commitment to be more generous in certain respects than the draft Withdrawal Agreement, a person will not be refused status under the EU Settlement Scheme if they are not economically active or they do not hold comprehensive sickness insurance.
• If you have been a resident in the UK for more than 5 continuous years when you apply, you will be eligible for settled status. If you have been a resident for less than 5 years when you apply, you will be eligible for pre-settled status.

There would be some changes to the EU Settlement Scheme if the UK leaves the EU without a deal, which are set out in the policy document. In particular, as there will be no agreed implementation period, the application deadline will be brought forward to 31 December 2020.

There will be different arrangements for EU citizens arriving in the UK after 29 March 2019 in the event of a no deal, and details of these will be set out in due course.

Sainsburys/Asda-The Competition and Markets Authority is delaying publishing its initial findings on the merger of J Sainsbury and Asda from early next month to early February.

The regulator reported the change to the merger inquiry timetable a day after it emerged that the grocers were seeking a judicial review of its decision to refuse their request for an 11-day extension. They had asked for an extension over the Christmas period so that they could “respond to a large amount of material recently provided to us”. Sainsbury’s and Asda have won extra time to respond to a competition authority investigation into their planned £7.3bn merger. A competition appeal tribunal hearing in London on Friday ruled that the Competition and Markets Authority (CMA) must give lawyers for Sainsbury and Asda more time. The watchdog said that the change to the timetable was unrelated to the legal action under way and that its final statutory deadline to make a ruling still remained March 5. The delayed publication of the provisional findings also does not help Sainsbury’s and Asda, which face December deadlines for their submissions and want more time to respond to the CMA.

The Food Standards Agency: are inviting applications from science experts of diverse backgrounds to join their Scientific Advisory Committees. This is part of the Agency’s preparedness plans for EU Exit in the context of continuing to ensure food and feed safety risk assessment. The recruitment is to fill 40 new positions with the deadline of Friday 04 January 2019, and interviews of shortlisted applicants to take place in February. Anyone interested in applying can contact the FSA directly as per the following link, https://www.food.gov.uk/about-us/join-our-scientific-advisory-committees

 

GCA-Please find a link to edition 17 of the Groceries Code Adjudicator (GCA) newsletter.

 

The newsletter is also available on the GCA website – www.gov.uk/gca.

 

 

EP Committee recommends greater transparency on pesticides data: A Special Committee of the European Parliament’s (EP) has agreed that the public should be granted access to the studies used in the procedure to authorise a pesticide, including all the supporting data and information relating to the applications. MEPs will vote on this Committee report during the plenary session in Strasbourg from 14-17 January.

 

Allergens – Meeting to Discuss Proposed Changes on Allergen Labelling: Defra announced on 28 November 2018 that the Secretary of State, Michael Gove, had met with allergen groups, retailers and other stakeholders to discuss proposed changes in the law around allergen labelling.  The meeting, which took place on 26 November 2018, involved allergy groups, academics, clinicians and industry stakeholders, including Allergy UK, the British Retail Consortium and FDF. Discussion centred around options for the introduction of revised allergen labelling laws.

The Secretary of State reiterated that the review of allergen labelling rules was progressing well and on track to bring forward proposals to change the law around the turn of the year. He also stressed that businesses do not need to wait for the law to change and should be doing all they can now to make sure consumers have the information they need to stay safe.