UK – Life after Brexit
- 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-Brexit recovery.
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. 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.
 Page, D and Kerr, A, “UK faces Brexit-fuelled General Election – what happens next?”, AXA IM Research, 14 Nov 2019.
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.
This document has been edited by AXA INVESTMENT MANAGERS SA, a company incorporated under the laws of France, having its registered office located at Tour Majunga, 6 place de la Pyramide, 92800 Puteaux, registered with the Nanterre Trade and Companies Register under number 393 051 826. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.
In the UK, this document is intended exclusively for professional investors, as defined in Annex II to the Markets in Financial Instruments Directive 2014/65/EU (“MiFID”). Circulation must be restricted accordingly.
© AXA Investment Managers 2019. All rights reserved