Record UK employment levels and healthy household spending have contrasted with feeble productivity growth and stagnant business investment in 2019. The year has been one of dichotomy for the British economy.
Economic growth is running at its slowest rate since the financial crisis, but the past year has not been all gloom.
As well as a strong labour market, the UK current account deficit fell to its lowest level since 2012 on the back on an improved trade performance. Below are four important economic trends of 2019.
1. Economic growth has been disappointing in 2019
For all prime minister Boris Johnson’s talk of getting the economy “going gangbusters” after his election as Conservative leader in the summer, the performance has been disappointing.
The most recent official data show the UK economy grew only 0.8 per cent in the three months to October compared with the same period in 2018.
This was the slowest annual rate of growth since early 2010, highlighting the impact of persistent Brexit uncertainty on consumer and business sentiment.
The calendar year growth rate for 2019 is expected to be close to 1.2 per cent, which would make it the worst annual performance in a decade.
Britain has not been alone, however, in recording a weak year. Almost all advanced economies were hit by global trade tensions focused principally on the US and China, which notably hurt manufacturing companies.
The world economy is expected to post its worst performance in 2019 since the financial crisis, according to the IMF.
But disappointment was more acute in the UK than in many other countries. IMF figures show that the downgrades in UK growth forecasts for 2019 have been larger than elsewhere.
Jonathan Portes, professor of economics at King’s College London, highlighted how UK growth was swayed last year by companies stockpiling inventory and finished goods because of the risk of a no-deal Brexit in March and October.
He said: “While there have been ups and downs in measured growth as a result of stockpiling, the underlying picture is of weakness, partly driven by Brexit uncertainty, partly by wider factors.”
2. The labour market was strong, but recently showed signs of cooling
The employment rate reached a new record high of 76.2 per cent in the three months to October, according to the latest official data.
With unemployment falling to a multi-decade low of 3.8 per cent, Britain had a year of de facto full employment in 2019. Compared with the start of 2008 — before the banking crash happened — there are almost 1.5m more people in full-time employment.
The good news has extended to wages: regular pay growth rose to 3.9 per cent in the summer, the highest increase for 11 years.
Nye Cominetti, analyst at the Resolution Foundation, a think-tank, said: “We’ve approached the end of the year with the labour market in, to coin a phrase, a strong and stable position.”
But there is now some evidence of the labour market starting to cool. Job vacancies have been falling during 2019, and in the latest data are now almost 7 per cent lower than a year ago.
Meanwhile wage growth has peaked, with average weekly earnings rising by 3.5 per cent in the three months to October.
3. Households and companies have had a very different view of the future
Ever since the 2016 Brexit referendum, households have kept their nerve better than companies.
Even when workers’ incomes stalled as inflation outpaced wage increases, mainly in 2017, household spending rose as people financed their spending habits by saving less.
The savings ratio — the percentage of annual household income left unspent — fell from 10 per cent in 2015 to an average of less than 6 per cent in 2019.
Companies have proved less resilient than households. Compared with the second quarter of 2016, household spending was almost 6 per cent higher in the third quarter of 2019, while business investment was up only a little over 1 per cent.
More recently there have been signs that this contrast might be beginning to abate. Business investment has stabilised after a terrible 2018, while retail sales growth fell to an annual rate of only 1 per cent in November.
Business was buoyed by the decisive outcome of the December 12 general election, hoping that an end to political deadlock at Westminster to resolve Brexit will encourage more investment, although much will depend on negotiations between the UK and the EU on the long term trade relationship between the two sides.
Carolyn Fairbairn, director-general of the CBI employers’ organisation, expressed optimism about higher investment, but said: “Firms stand ready to bring the evidence needed from factories and boardrooms [about what the UK-EU trade deal should involve] . . . to enable a good trade deal to be agreed as quickly as possible.”
4. 2019 was the year that politicians sought to draw a line under austerity
If Brexit uncertainty hung over the economy for much of 2019, the public finances showed a step change as the Conservatives proposed an end to austerity.
After adjusting for inflation, restated forecasts at the end of the year by the Office for Budget Responsibility, the UK fiscal watchdog, showed total managed expenditure growing by 1.3 per cent.
This would be the highest rate since the effects of former chancellor George Osborne’s first austerity Budget in 2010. Public borrowing is due to be higher this financial year than last, marking the first increase in the deficit for almost a decade.
As 2019 drew to a close, Robert Chote, OBR chair, said the Conservatives’ proposals suggested the government was on track to hit its target of a current budget surplus “but by a smaller margin” than the government had previously predicted.