Start of the year business optimism but will it be sustained?
Macroeconomic overview from Paul Hollingsworth, Senior European & Chief UK economist, BNP Paribas
Some of you might have started this year with a renewed sense of optimism. The global economy doesn't appear to be quite on a precipice anymore.
December’s general election result put a tumultuous year in politics behind us and in recent weeks key business indicators have been picking up. The question is whether the economy is set for a ‘Boris Bounce’ - something more durable - or whether this is a ‘dead cat bounce’ and ultimately uncertainties will persist and weigh on growth. The answer, I believe, is somewhere in the middle.
It's early days and we've got some key events to come: The Bank of England decision on interest rates, the budget in March where we’ll get a better idea of the Government agenda and Brexit trade negotiations which haven't formally begun yet.
Nonetheless, the global economy appears to be in a better place. The signing of the US-China trade deal has provided optimism for the markets although phase two trade talks will no doubt be difficult.
Global trade indicators have begun to pick up including for Europe. In the second half of last year, there was concern about the European economic outlook, the US trade war and slow-down in trade were having an impact, but some of these risks have now receded somewhat.
For the UK, indicators such as the Deloitte CFO Survey and the IHS Markit PMI paint a rosier picture for activity and sentiment at the turn of the year.
How sustainable this change is in part depends on how businesses respond to this reduction in uncertainty, whether it is enough to provide a fillip to investment. After all, uncertainty has not gone away completely. But businesses have held off on investing for a number of years now. This can only go on for so long.
It also depends on the labour market, which had started to show some cracks towards the end of last year. Some indicators might show a more positive sentiment but that needs to lead to hard data going forward. That said, consumer fundamentals remain relatively strong: unemployment is very low, and real wage growth is pretty robust.
Finishing on Brexit, the chances of a comprehensive deal by the end of the year are slim, as is an extension to the transition period (which must be decided by 1st July). But the risks of a no-deal seem to have reduced.
I think the two most likely scenarios at this stage are either a limited free trade agreement, leaving much of the economy (including the important services sector) operating on WTO rules only, or a free trade agreement with further transitional periods / implementation phases to help to smooth out the adjustment to the new regime. We’ll know more as the negotiations get underway in spring.
To sum up, there are signs which support room for optimism. But how that translates into hard economic data will be more telling.