Yay
Nick Chadbourne, chief executive, LMS
Brexit. Trump. China. Last year was the year of political uncertainty; and, where there is uncertainty, economic instability inevitably follows.
In the UK we experienced a weakening of both the manufacturing and retail sectors – two pillars of our economy – so it was no surprise that in August the economy shrank by 0.2 per cent, the first contraction since 2012.
Nearly 100,000 retail jobs and almost 10,000 stores disappeared across the country, and spending growth was at the slowest rate since 2010; manufacturers faced low domestic and foreign demand and were cautious with investment and purchases of capital goods, bringing the worst output and orders balances for years. Inflation then fell by 0.2 per cent in December, putting us 0.7 per cent off the Bank of England target rate.
This led to many in the City calling for a base rate cut, but the BoE Monetary Policy Committee kept its powder dry and the rate was held.
Whisper it, but the global economy seems to be enjoying a period of relative stability, thanks in no small part to an easing of trade tensions between the US and China, and the UK finding its feet as a nation independent of the EU.
My question would be: for how long can this last? As the US election campaign hots up and the UK’s Brexit transition period draws to a close, there will inevitably be a return to the political instability of last year. For this reason I expect a rate cut in H1 2020. Put simply, it is the best way to stimulate the economy and continue this period of relative prosperity.
The BoE MPC must be proactive, not reactive. It must act now and cut the rate to head off instability at the pass, rather than wait for international trade negotiations to stall, a hard Brexit with no trade deal between the UK and the EU by the end of the year, or a reignition of Trump’s war of words with China.
Nay
Jonathan Samuels, chief executive, Octane Capital
In the minutes of its January MPC meeting, the BoE was sanguine about the UK economy. Yes, it conceded that GDP growth had slowed last year given the weaker global economy and elevated Brexit uncertainties, but it was more focused on the future.
It noted that the UK was likely to benefit from a pick-up in global activity in 2020, a “further decline in Brexit uncertainties and the government’s announced spending measures” (in short, any stimulus set to be announced in the March Budget).
Its cautious confidence was underlined by the fact that it even alluded to the potential for a rate hike: “If the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy may be needed to maintain inflation sustainably at the target.”
Given the bleak datasets that emerged at the beginning of January, which saw sterling flounder as markets priced in a rate cut, the BoE’s overall upbeat tone came as a bit of a surprise. Even the arch-Brexit pessimist, Mark Carney, acknowledged that our exit from the EU hadn’t caused the sharp downward spiral many had predicted.
My take is that MPC members applied a bit of good old-fashioned common sense and concluded that 2019 was an artificial year in many respects and could be taken with a pinch of salt.
A raft of strong PMI reports in early February reflected how business sentiment had indeed lifted materially since the general election result, and how there was now increased confidence across all sectors of the economy.
Clearly, we have yet to see if this renewed confidence will translate into stronger economic numbers, and there is always the change of a deadlock in trade negotiations.
Overall, however, my view is that, in the absence of a black swan (an unexpected and highly negative political or economic development), a rate cut in the first half of the year is unlikely. The UK economy and the property market have a spring in their step and the signs are that this will continue.
