12th February 2020
2020 UK Outlook: After the Election, What Next?
By Chris Bailey, European Strategist, Raymond James Investment Services Ltd.
Many additional months of negotiation will be required to finalise the regulations and rules associated with the Brexit divorce.
Despite dull 2020 economic growth forecasts, there is some hope for the UK economy.
Overall at-the-margin policy remains loose and the Pound has not risen significantly enough to constrain exporters.
After the dust has fallen on the first December election in nearly a century, what should we anticipate next for both the UK economy and the financial markets in 2020?
At the time of this writing, the UK still remains a member of the European Union. However, it is reasonable to assume that this will not be the case for much longer, following the result of the mid-December general election. However – as is the nature of modern-day trade deals – this simply marks the end of the beginning for the Brexit debate. Many additional months of negotiation will be required to finalize the regulations and rules associated with the divorce. Early indications by the newly elected government suggest they see the end of 2020 as a time limit for these discussions in order to completely ‘take back control’. Such a timetable though could plausibly create another one of the ‘cliff-edge’ moments – which have populated the Brexit debate over recent years – given the complexity of forging such a trade deal.
This is especially true that all this will be happening at a time when other bilateral deals – with other important trading partners or economic blocs – may also be considered or drawn up.
Such fears are maybe why turn-of-the-year economic growth projections are not rampant, with a survey by one leading financial newspaper concluding that a majority of economists they polled predicted that UK economic growth will show ‘little or no improvement’ in 2020 compared to 2019. Given the relative dullness of the likely full-year 2019 eventual out-turn of around a 1.2 percent economic growth level, a continuation of this level of performance would be disappointing.
Brexit – The Final Countdown
However – quite literally – there is some hope. December’s UK purchasing managers’ indices data showed an improvement between the initial ‘flash’ report released at the end of last year (when most of the polling was undertaken before the general election result) and the ‘final’ report which had data throughout the month. Similarly, respected measures of consumer confidence showed some tentative hopes of improvement in data published in late December. One survey even observed that ‘households said that they were feeling more optimistic about the future and increasingly committed to making large purchases’. Given that consumer spending is typically over two-thirds of an established developed economy such as the UK, this does provide some further hope. And the Bank of England appears unlikely to upset the apple cart. Consensus expectations are for no change in UK interest rates in the foreseeable future despite the imminent change of Governor from Mark Carney to Andrew Bailey. By contrast, the other classic policy lever – fiscal policy covering government tax and spending initiatives – appears to be in a rude stimulus-friendly health with a number of budget deficit boosting policies being initiated in the first few weeks of the new parliamentary term. Another angle with some reference to fiscal policy which has gained predominance in the last couple of months is regional policy. The new government’s ‘one nation’ focus could encourage some new growth stimulus. Sustainability, however, is likely to come from the business investment and entrepreneurial zeal that is not solely encouraged by government spending and tax breaks. Nevertheless offering these initially is a start.
Overall, at-the-margin policy remains loose and the Pound – whilst above the levels of last summer – has not risen significantly enough to constrain exporters. Therefore a combination of easy comparisons, some improvement in business and consumer confidence levels plus loose monetary and fiscal policy, is providing a supportive backdrop for global investors to consider closing the significant underweight position they have in UK equity positions in 2020. On conventional earnings, cash flow or dividend based UK investments look attractive enough, however, sustainable inflows will only occur if the lapsing of one Brexit logjam or cliff edge is not effectively replaced by another in the form of a lacklustre conclusion to those very specific ongoing trade discussions. The devil has always been in the details with Brexit – and this will very much remain the case for UK economic and political scene watchers as well as all interested investors in 2020.
In short, have policymakers learnt that a bit of flexibility and pragmatism can go a long way – in combination with a workable Parliamentary majority – in not only providing some clarity but also avoiding the dreaded cliff-edges? Naturally, such thoughts apply not only to UK trade policy but those of other nations around the world too. After all, in the modern global economy, even a post-Brexit UK economy would be foolish to have too many isolationist instincts. On balance – and influenced by attractive UK equity valuations versus both the local fixed income market and general global equities – the glass for 2020 should be watched closely but should also be viewed as being half-full.