BCC Forecast: Brexit stockpiling to hit economic growth in coming years

The British Chambers of Commerce (BCC) has today (Monday) released its latest economic forecast, upgrading its growth expectations for the UK in 2019 to 1.3% (from 1.2%). However, the leading business group has downgraded its growth forecast for 2020 to 1.0% (from 1.3%) and to 1.2% (from 1.4%) in 2021.

The leading business group has slightly upgraded its growth forecast for 2019, driven by the exceptionally rapid stock-building early in the year. However, the immediate boost to UK GDP is forecast to come at the cost of more subdued growth in 2020 and 2021 as the unwinding of historically-high inventory levels, coupled with weaker business investment, weigh on economic activity.

Business investment is forecast to contract at a faster rate in 2019 and recover more slowly in 2020 than expected in our previous forecast. The continued Brexit impasse, including the growing possibility of a no-deal exit, together with the high upfront cost of doing business in the UK and the running down of excess stock, is expected to suffocate investment activity over the near term.

Trade is projected to make a negative contribution over the forecast period as exchange rate volatility, Brexit uncertainty and a subdued global economy, weaken trading conditions for UK exporters. In contrast, consumer spending is expected to remain resilient with earnings growth forecast to continue to exceed price growth over the forecast period and unemployment forecasted to remain low by historic standards.

The BCC’s latest forecast is a clear warning sign that the next Prime Minister must set out a clear roadmap for how the political impasse in Westminster can be broken and an agreement reached to prevent further slowdown in the economy.

The Chamber Network is also calling for a strong and clear strategy on the domestic agenda, including urging the next government to use the forthcoming Comprehensive Spending Review to affirm its commitment to delivering major infrastructure projects, such as HS2, that underpin economic growth.

The BCC forecast assumes that the UK avoids a messy and disorderly exit from the EU. Another scenario would lead to revisions in the next forecast.

Commenting on the forecast, Suren Thiru, Head of Economics at the British Chambers of Commerce, said:

“The revisions to our forecast suggest that the UK economy is likely to remain on a disappointingly subdued growth path for some time to come.

“It is increasingly likely that the temporary boost from historically high stockpiling in Q1, which has marginally improved the growth outlook for this year, will be surpassed over the medium-term by the negative impact from the running down of these inventories. The downward pressure on business activity and investment intentions from the unwinding of stocks is likely to be exacerbated somewhat by increasing cost pressures and Brexit uncertainty, slowing overall economic growth across the forecast period.

“The deteriorating outlook for business investment is a key concern as it limits the UK’s productivity potential and long-term growth prospects. On the upside, household spending, a key driver of UK economic output, is expected to be supported by relatively low unemployment and positive real wage growth.

“A messy and disorderly exit from the EU remains the main downside risk to the UK’s economic outlook as the disruption caused would increase the likelihood of the UK’s weak growth trajectory translating into a more pronounced deterioration in economic conditions.”

Responding to the forecast, Adam Marshall, Director General of the British Chambers of Commerce, added:

“While politicians are distracted, businesses are left with no choice but to try and prepare for the unwanted possibility of leaving the European Union on 31^st October without a deal and transition period. Businesses are putting resources into contingency plans, such as stockpiling, rather than investing in ventures that would positively contribute to long-term economic growth. This is simply not sustainable. Business communities expect the next Prime Minister to quickly find a sensible and pragmatic way forward to avoid a messy and disorderly Brexit. 

“The UK’s low-growth trajectory makes clear that we can’t afford for Westminster to keep turning a blind eye to the domestic agenda. The upcoming Comprehensive Spending Review is an opportunity for the next government to affirm its commitment to support economic growth, including investment in the skills and training system and infrastructure projects, such as high-speed rail and the city regeneration schemes linked to them. Businesses will also be expecting action to alleviate the heavy burden of upfront costs, which stunt growth.”

Key points in the forecast:

• UK GDP growth forecast for 2019 is upgraded from 1.2% to 1.3% and downgraded from 1.3% to 1.0% in 2020 and from 1.4% to 1.2% in 2021
• Quarter-on-quarter GDP growth is forecast to slow to 0.0% in Q2 2019, down from 0.5% growth in Q1
• Forecast for business investment growth been downgraded to -1.3% for 2019 (from -1.0%) and to 0.4% for 2020 (from 0.6%), before growth of 1.1% in 2021
• BCC expects export growth of 1.6%, 1.6% and 1.7%, compared to import growth of 4.3%, 1.8% and 2.2%.
• Forecast for growth in household consumption been upgraded to 1.4% for 2019 (from 1.3%), followed by growth of 1.4% in 2020 and 1.5% in 2021
• Average earnings growth is expected to outstrip inflation over the period, with growth of 3.0%, 2.9% and 3.0% respectively, compared with inflation of 2.1% in 2019 and 2020, and 2.0% on 2021
• UK official interest rates are expected to remain at 0.75% throughout 2019, before rising to 1.0% in 2020
• In terms of sectors, growth in services has been upgraded to 1.4% (from 1.1%) in 2019 but downgraded to 1.2% (from 1.3%) and to 1.4% (from 1.7%). Growth in manufacturing has also been upgraded for 2019 to 1.0% (from 0.5%) in 2019 but downgraded to 0.5% (from 0.7%) in 2020 and 0.7% (from 0.8%) in 2021. Construction sector growth is expected of 1.0%, 0.9% and 1.0% respectively.