uk economic outlook · pwc uk economic outlook we expect 2019 to be a less impressive year for the...

UK Economic Outlook

March 2019

PwC UK Economic Outlook

Contents

2

• Global growth outlook

• UK economic trends and prospects

• Outlook for consumer spending and online retail sales

• Regional growth trends and prospects

Global growth outlook


We expect 2019 to be a less impressive year for the global economy than 2018, with slower growth in the US, China and Europe

4

Weather icons based on comparisons of projected GDP growth rates with potential GDP growth rates

Key

= % GDP growth in 2019Country

x.x

Global (MER) 3.0%

Global (PPP) 3.6%

Eurozone 1.3%

France

1.3

Mexico

2.3

US

2.4

Spain

2.3

UK

1.1Germany

1.0

Canada

2.0

Russia

1.5

Greece

2.0

Italy

0.5

Japan

1.0

South Africa

1.6Brazil

2.4

Australia

2.8

China

6.3

India

7.6

Ireland

3.5

Source: PwC main scenario


In 2020, growth could pick up slightly in the Eurozone, but may continue to slow in the US and China

5

Weather icons based on comparisons of projected GDP growth rates with potential GDP growth rates

Key

= % GDP growth in 2020Country

x.x

Global (MER) 2.9%

Global (PPP) 3.5%

Eurozone 1.6%

France

1.5

Mexico

2.7

US

1.9

Spain

1.8

UK

1.6Germany

1.6

Canada

1.8

Russia

1.8

Greece

2.2

Italy

0.9

Japan

0.3

South Africa

1.7Brazil

2.1

Australia

2.7

China

6.2

India

7.7

Ireland

3.7

Source: PwC main scenario

UK economic trends and prospects


Following a strong summer, UK economic growth slowed at the end of 2018 as Brexit-related uncertainty dampened investment

7

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2016 2017 2018

% c

hange o

n p

revi

ous q

uart

er

GDP Consumer expenditure Business investment


The services sector has grown steadily ever since the financial crisis. Manufacturing has generally been weaker, while construction has been volatile

8

70

80

90

100

110

120

130

2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016 Q3 2017 Q3 2018 Q3

Services GDP Manufacturing Construction

Services

GDP

Manufacturing

Construction

Source: ONS

Index (Q1 2007 = 100)


The services PMI has slowed markedly relative to 2014-15, while a stronger manufacturing performance in 2017 has petered out

9

Source: Markit/CIPS

30

35

40

45

50

55

60

65

2007 JAN 2008 MAY 2009 SEP 2011 JAN 2012 MAY 2013 SEP 2015 JAN 2016 MAY 2017 SEP 2019 JAN

Services Manufacturing

Above 50 indicates

rising activity levels

Services

Manufacturing

Purchasing Managers’ Indices of business activity


Sterling has fallen back against the dollar since mid-2018 and has been relatively weak against the euro ever since the EU referendum

10

US dollar and euro exchange rates against the pound

1.0

1.1

1.2

1.3

1.4

1.5

1.6

2016JAN

2016FEB

2016APR

2016JUN

2016JUL

2016SEP

2016NOV

2016DEC

2017FEB

2017APR

2017JUN

2017JUL

2017SEP

2017NOV

2017DEC

2018FEB

2018APR

2018JUNE

2018JULY

2018SEP

2018NOV

2018DEC

2019FEB

US Dollar Euro

USD/£

EUR/£

Source: Bank of England

EU referendum


The economy has created a record number of jobs in recent years, but productivity growth has remained weak ever since the crisis

11

Source: ONS

85

90

95

100

105

110

2000Q1

2000Q4

2001Q3

2002Q2

2003Q1

2003Q4

2004Q3

2005Q2

2006Q1

2006Q4

2007Q3

2008Q2

2009Q1

2009Q4

2010Q3

2011Q2

2012Q1

2012Q4

2013Q3

2014Q2

2015Q1

2015Q4

2016Q3

2017Q2

2018Q1

2018Q4

Productivity (per worker) Employment

Index 2008 Q1 = 100

Jobs

Productivity


In our main scenario, UK growth could pick up to 1.6% in 2020 assuming an orderly Brexit, but risks are weighted to the downside

12

Source: ONS, PwC scenarios

-8%

-6%

-4%

-2%

0%

2%

4%

2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020 Q1

Main scenario Downside Strong growth

Projections

% r

eal

GD

P c

hange,

year

on y

ear

Weak growth


Growth projected to be similar across most UK regions in 2019-20, but Northern Ireland and the North East may lag behind

13

Source: PwC analysis

0.0%

0.5%

1.0%

1.5%

2.0%

South East London South West Scotland EastMidlands

UK East North West WestMidlands

Wales Yorks &Humber

North East N. Ireland

20192020

% c

hange,

year

on y

ear

PwC main scenario for output growth by region (assuming an orderly Brexit)


In our main scenario, UK inflation remains close to its 2% target rate in 2019-20 – but considerable uncertainty around this depending on how exchange rates and commodity prices evolve

14

Source: ONS, PwC scenarios

Alternative UK inflation (CPI) scenarios

0%

1%

2%

3%

4%

5%

2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020 Q1

High inflation Low inflation Main scenario Inflation target

Inflation target = 2%

Projections

% c

hange,

year

on y

ear


Average earnings are now growing significantly faster than prices and we expect this to continue in 2019-20 in our main scenario

15

Source: ONS, PwC analysis

0%

1%

2%

3%

4%

5%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Prices (CPI) Average weekly earnings (excl bonus)

Prices (CPI)

Earnings

Projections

CPI inflation vs. average earnings growth

% c

hange,

year

on y

ear


Summary: UK economic prospects and policy implications

16

1UK economic growth has slowed as

Brexit-related uncertainty has led to a

decline in business investment. But

consumer spending has held up

better so far.

4In our main scenario we assume a

single quarter-point interest rate rise

later in 2019 and one further such

increase in 2020, but only if there is

an orderly Brexit.

2Assuming an orderly Brexit, our main

scenario is for UK GDP growth to

remain modest at around 1.1% in

2019 but then pick up to around 1.6%

in 2020 as investment revives.

5There are particularly large

uncertainties around economic

projections at present. A disorderly

‘no deal’ Brexit could push growth

into negative territory, despite some

offset from likely mitigating actions.

3Most industry sectors are projected to

see relatively slow growth in 2019,

though this is highly dependent on

how the Brexit negotiations evolve.

Manufacturing and other export-

intensive sectors also face downside

risks from any further deceleration in

global growth in 2019-20.

Outlook for consumer spending and online retail sales


UK household savings ratios have been falling since the global financial crisis as spending growth has outpaced growth in incomes

18

Source: PwC analysis of ONS data

Headline and adjusted UK household savings ratios (as % of disposable income)

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2001 Q1 2002 Q3 2004 Q1 2005 Q3 2007 Q1 2008 Q3 2010 Q1 2011 Q3 2013 Q1 2014 Q3 2016 Q1 2017 Q3

Headline savings ratio (with net equity) Adjusted savings ratio (without net equity)


We expect slower household spending growth in 2019, although a rise in income growth will cause the savings ratio to rise. Spending growth could pick up from 2020 assuming an orderly Brexit

19

Source: PwC analysis based on ONS data for 2017-2018 Q3

Main scenario projections of growth in real household expenditure and disposable

income (% per year)

2017 2018e 2019p 2020p Average 2021-30p

Real household expenditure 2.1% 1.9% 1.4% 1.7% 1.8%

Real household disposable income 0.5% 1.7% 1.8% 2.0%

Adjusted savings ratio (% disposable

income)

1.4% 1.3% 1.7% 2.0%


Continued growth in house prices could mean that housing and utilities account for over 30% of household budgets by 2030

20

Source: ONS for historical data, PwC main scenario projections for 2030


Projections

The online share of spending on food, furnishings and clothing is expected to continue to increase steadily to 2030

21

Source: ONS data and PwC calculations

Note: Figures from 2019 onwards are PwC projections

0%

5%

10%

15%

20%

25%

30%

35%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Food Furnishings Clothing

% o

f to

tal

reta

il sale

s m

ade o

nlin

e b

y segm

ent

Clothing

Furnishings

Food


Summary: Outlook for consumer spending and online retail sales

22

1Since 2013 household spending has

outpaced consumer price inflation,

helped by continued low interest

rates, strong employment growth and

a willingness of households to borrow

more. Growth in consumer spending

has slowed since 2016 due to a

weaker pound and rising inflation.

4The proportion of sales conducted

online doubled in each of the food,

furnishing and clothing categories

between 2010 and 2018.

2Assuming an orderly Brexit, we

project that real consumer spending

will slow from around 1.9% in 2018 to

1.4% in 2019, before returning to its

trend growth of around 1.8% on

average in the 2020s.

5Online share of retail spending could

rise between 2018 and 2030 from 5%

to 8% for food, from 10% to 22% for

furnishings, and from 18% to 32% for

clothing.

3We expect that housing and utilities

will absorb a larger share of

household spending, rising above

30% by 2030. Financial services and

personal care could account for a

greater proportion of spending by

2030, while food, clothing and

transport see their shares decline.

Regional growth trends and prospects


London was among the slowest growing UK regions in the 1970s as its population fell (and did not stand out from the pack in 1980s)

24

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

London South West NorthernIreland

South East EastMidlands

Scotland East ofEngland

Wales North West Yorkshireand theHumber

WestMidlands

North East

1970s 1980s

Average annual real GVA growth by region

Source: PwC analysis of ONS and ESCoE data


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

London SouthWest

NorthernIreland



Wales NorthWest

Yorkshireand theHumber

WestMidlands

North East UK

1990s 2000s 2010s

Since the 1990s, London has been by far the fastest growing region in the UK – but no consistent growth ranking for other regions

25


Average annual real GVA growth by region


-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1972-79 1980-89 1990-99 2000-09 2010-17

South West South East East MidlandsScotland North West Yorkshire and the HumberWest Midlands North East UK average

Although some regions experienced population decline in the 1970s and 1980s, all regions have seen growth since 2000

26


Average annual population growth by decade for the UK and selected regions


Population growth has made a more substantial contribution to economic growth in the South and East than Scotland and the North

27


Average annual regional growth rates (1972-2017)

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

London South West NorthernIreland



Wales North West Yorkshireand theHumber

WestMidlands

North East

GVA per capita growth Population growth


-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1972-79 1980-89 1990-99 2000-09 2010-17

Population growth Total GVA growth GVA per capita growth

Growth in London’s GVA per capita has slowed over time, but this has been more than offset by rising population growth

28


Population, GVA and GVA per capita growth for London (% pa)


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1972-79 1980-89 1990-99 2000-09 2010-17

GVA per capita growth - London GVA per capita growth - UK average

GVA per capita in London has consistently grown at a faster rate than the UK average – but both have slowed markedly since 1980s

29


Annual average real GVA per capita growth in London and the UK


GVA growth in information and communications and professional services has outpaced the national average since 1998

30


Manufacturing

Construction

Wholesale and retail trade; repair of motor vehicles

Transportation and storage

Information and communication

Financial and insurance activities

Real estate activities

Professional, scientific and technical activities

Administrative and support service activities

Public administration and defence

Education

Human health and social work activities

(2.0%)

(1.0%)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

(0.5%) 0.5% 1.5% 2.5% 3.5% 4.5% 5.5% 6.5% 7.5% 8.5%

Annual

ave

rage r

eal gro

wth

rate

2008

-2017

Annual average real GVA growth rate 1998-2007

Note: Size of bubbles indicates relative sectoral GVA in 2017. Mid-point of the bubbles indicates average real GVA growth rates in the two periods shown on the axes.

Annual average UK GDP growth rate 1998-2007 (2.8%)

Annual average UK GDP growth rate 2008-2017 (1.1%)

Below average growth in both periods Above average growth in one period, below in the other Above average growth in both periods


Share of manufacturing output negatively correlated with regional GVA growth, while the share of professional services shows a strong positive correlation with regional growth

31


North East

North West

Yorkshire and the Humber

East Midlands

West Midlands

East of England

London

South East

South West

Wales

Scotland

Northern Ireland

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0% 5% 10% 15% 20%

Avera

ge a

nnual

GVA g

row

th 1

998-2

017

Manufacturing GVA as % of total regional GVA (average for 1998-2017)

North EastNorth West

Yorkshire and the Humber

East Midlands

West Midlands

East of England

London

South East

South West

WalesScotland

Northern Ireland

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

3% 5% 7% 9% 11%

Ave

rage a

nnual

GVA g

row

th 1

998

-2017

Professional, scientific and technical activities GVA as a % of total regional GVA (average for 1998-2017)


Regions with high public sector employment have seen slower GVA growth since 2010, while regional growth is positively correlated with higher education levels

32


North East

North West

Yorkshire and The Humber

East Midlands

West Midlands

East of England

London

South East

South West

WalesScotland

Northern Ireland

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

14% 19% 24% 29%

Ave

rage a

nnual

GVA g

row

th (

2010-1

7)

Average % of total employment in public sector (2010-2017)

North East

North West

Yorkshire and The Humber

East Midlands

West Midlands

East of England

London

South East

South West

Wales

Scotland

Northern Ireland

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

25% 30% 35% 40% 45% 50%

Ave

rage a

nnual

GVA g

row

th (

2010

-2017)

Average % of population with degree (or equivalent and above) aged 16-64 (2010-2017)


(1.0%)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Scotland South West EastMidlands

WestMidlands

North West Wales UnitedKingdom

East ofEngland

NorthernIreland

South East North East Yorkshireand TheHumber

London

House price change in year to December 2017 and year to December 2018 1

2017 2018

Reversing earlier trends, London has seen the weakest house price growth of all UK regions over the past two years

33

Source: ONS house price index based on Land Registry data

1 Except for Northern Ireland where data are for the year to Q4 2017/2018 as monthly data are not available


London’s employment rate has also risen by less than the UK average over the past year (with Wales seeing the largest rise)

34

(1.0%)

(0.5%)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Wales NorthernIreland

North West Scotland South West East ofEngland

UK Yorkshireand theHumber

London WestMidlands

EastMidlands

North East South East

Change in employment rate (aged 16-64) in year to Q4 2018

Source: ONS data


Summary: Regional growth trends and prospects

35

1London had relatively slower GVA growth in the 1970s

and early 1980s as people moved out of the capital. This

began to reverse with the financial deregulation of the

mid-1980s, which boosted London’s population and GVA

growth to well above the UK average. At the same time, a

sharp decline in manufacturing activity hit traditional

industrial regions in the North, West Midlands and Wales

4All regions continue to be affected by uncertainties

relating to the future UK-EU relationship after Brexit. But

they could see some boost to growth later this year and

into 2020 if the downside risks associated with a

disorderly Brexit can be avoided.

2Since the 1990s, London’s growth has been much faster

than any other region. But relative growth rankings of

regions outside the capital have varied across decades

without a clear, consistent pattern. All regions have seen a

boost to total output growth from increased immigration

since the early 2000s, but real output per capita growth

has fallen relative to earlier decades.

3There are signs from the latest housing and labour market

data that London’s relative performance may have been

weaker in 2018. We expect this to continue in 2019-20,

with London growing at only a slightly faster rate than the

UK average in those years.


Contacts for more information about this report

36

John Hawksworth

Chief Economist

[email protected]

Mike Jakeman

Senior Economist

[email protected]

For more information about our Economics services, or

to access the full report, please see our website at:

http://www.pwc.co.uk/economics

http://www.pwc.co.uk/ukeo

Hoa Duong

Economist

[email protected]

Megan Wulff

Economist

[email protected]

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2019 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a

separate legal entity. Please see www.pwc.com/structure for further details.

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