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Ten things to worry about in 2019 Ten things to worry about in 2019
(35 minutes later)
Recessions are always easy to spot in retrospect. With the benefit of hindsight, it is always easy to identify the warning signs of serious trouble ahead.Recessions are always easy to spot in retrospect. With the benefit of hindsight, it is always easy to identify the warning signs of serious trouble ahead.
Correctly forecasting recessions in advance demands a higher level of skill, as the Bank of England found in 2008 when it mistook the biggest slump since the second world war for a temporary growth slowdown.Correctly forecasting recessions in advance demands a higher level of skill, as the Bank of England found in 2008 when it mistook the biggest slump since the second world war for a temporary growth slowdown.
The UK suffered recessions in the mid-1970s, the early 1980s, the early 1990s and the late 2000s. On average, that means one every 10 years, and it is now a decade since the last one. So what could go wrong this time? Here are 10 things to look out for.The UK suffered recessions in the mid-1970s, the early 1980s, the early 1990s and the late 2000s. On average, that means one every 10 years, and it is now a decade since the last one. So what could go wrong this time? Here are 10 things to look out for.
A bad Christmas for retailersUnemployment is at its lowest since the mid-70s and wages are again rising faster than prices. Both these factors should support spending in the shops and online but early anecdotal evidence suggests consumers are keeping tight control over their spending. Households ran down their savings to finance spending when their real incomes were being squeezed by higher inflation. They may now be deciding to save more and spend less. A bad Christmas for retailersUnemployment is at its lowest since the mid-70s and wages are rising faster than prices again. Both these factors should support spending in the shops and online, but early anecdotal evidence suggests consumers are keeping tight control over their spending. Households ran down their savings to finance spending when their real incomes were being squeezed by higher inflation. They may now be deciding to save more and spend less.
The housing marketEvery measure of the residential property market is telling the same story – fewer homes are changing hands and prices are heading south. In part, that’s because prices were too high for first-time buyers, even at ultra-low interest rates, making a correction inevitable. But it also reflects – along with weak new car sales – a wariness about purchasing big-ticket items. The housing marketEvery measure of the residential property market is telling the same story. Fewer homes are changing hands and prices are heading south. In part, that’s because prices were too high for first-time buyers, even at ultra-low interest rates, making a correction inevitable. But along with weak new car sales, it also reflects wariness about purchasing big-ticket items.
Never mind the Brexit sideshow – recession is the real worry | Larry ElliotNever mind the Brexit sideshow – recession is the real worry | Larry Elliot
Crashing share pricesStock markets tend to anticipate events, falling months ahead of a recession and rising before the downturn is over. By that measure, 2019 is going to be a grim year because equity prices have been falling for months. The FTSE 100 has been trading at its lowest level in more than two years while shares on Wall Street were on course for their worst December since 1931, when the US was mired in the Great Depression. Crashing share pricesStock markets tend to anticipate events, falling months ahead of a recession and rising before the downturn is over. By that measure, 2019 is going to be a grim year because equity prices have been falling for months. The FTSE 100 has been trading at its lowest level in more than two years, and shares on Wall Street were on course for their worst December since 1931, when the US was mired in the Great Depression.
Rising interest ratesThe official cost of borrowing hit a trough of 0.25% in the aftermath of the EU referendum and now stand at 0.75%. The Bank of England says low unemployment is leading to faster earnings growth and has signalled its intention to keep withdrawing the stimulus provided during the recession of a decade ago. Threadneedle Street says further rate rises will be limited and gradual. Rising interest ratesThe official cost of borrowing hit a trough of 0.25% after the EU referendum and now stand at 0.75%. The Bank of England says low unemployment is leading to faster earnings growth and has signalled its intention to keep withdrawing the stimulus provided during the recession of a decade ago. It also says further rate rises will be limited and gradual.
The Bank runs out of ammoTraditionally the Bank of England responds to a struggling economy with deep cuts in interest rates. In 2008-09, for example, official borrowing costs came down from 5% to 0.5% in a matter of months. Were the economy to weaken significantly in 2019, the Bank would have only limited scope to reduce interest rates and would instead have to rely on the bond-buying process known as quantitative easing. On past form, this would be of limited effectiveness. The Bank runs out of ammoThreadneedle Street traditionally responds to a struggling economy with deep cuts in interest rates. In 2008-09, for example, official borrowing costs came down from 5% to 0.5% in a matter of months. Were the economy to weaken significantly in 2019, the Bank would have only limited scope to reduce interest rates and would instead have to rely on the bond-buying process known as quantitative easing. On past form, this would only be of limited effectiveness.
A trade warThe peace brokered between the US and China at the recent G20 summit is fragile. Washington is angry with Beijing over allegations of cyber espionage and theft of US property rights means the threat of an increase in protectionist measures is real. A full-scale trade war between the world’s two biggest economies would have knock-on effects on other countries, including the UK. A trade warThe peace brokered between the US and China at the recent G20 summit is fragile. Washington is angry with Beijing over allegations of cyber-espionage and theft of US property rights, and the threat of an increase in protectionist measures is real. A full-scale trade war between the world’s two biggest economies would have knock-on effects on other countries, including the UK.
A eurozone crisisTwo of the three biggest countries in the euro zone – Germany and Italy – saw their economies contract in the third quarter of 2018 as the waning impact of stimulus from the European Central Bank meshed with weaker global demand for manufactured goods. After a period of above-trend growth, the eurozone will, at best, grow only modestly in 2019. A eurozone crisisThe economies of two of the three biggest countries in the eurozone, Germany and Italy, contracted in the third quarter of 2018 as the waning impact of stimulus from the European Central Bank meshed with weaker global demand for manufactured goods. After a period of above-trend growth, the eurozone will, at best, grow only modestly in 2019.
PoliticsTheresa May’s uphill struggle to get her Brexit withdrawal bill through parliament has highlighted the gridlock at Westminster. Without the support of the DUP, the Conservatives will struggle to get legislation passed, but Labour would face the same problem if it formed a minority government. Traditionally, political uncertainty is bad for the economy. PoliticsTheresa May’s uphill struggle to get her Brexit withdrawal bill through parliament has highlighted the gridlock at Westminster. Without the support of the DUP, the Conservatives will struggle to get legislation passed, but Labour would face the same problem if it formed a minority government. Political uncertainty is traditionally bad for the economy.
Mothballed investmentCapital spending by business is volatile; it tends to rise strongly when the economy is doing well and fall heavily when times are bad. Business investment declined in each of the first three quarters of 2018 – highly unusual for the late stages of an economic cycle. Companies have waited for clarity about Britain’s departure from the EU before committing to major projects. Mothballed investmentCapital spending by business is volatile. It tends to rise strongly when the economy is doing well and fall heavily when times are bad. Business investment declined in each of the first three quarters of 2018, which is highly unusual for the late stages of an economic cycle. Companies have waited for clarity about Britain’s departure from the EU before committing to major projects.
BrexitLast but certainly not least, the fate of the economy during 2019 will be determined by how (or perhaps whether) the UK departs from the EU on March 2019. The Bank of England has already outlined a bleak worst-case scenario in which a chaotic departure plunges the economy into a bigger recession than in 2008-09. Other outcomes would be far less dramatic and the chancellor, Philip Hammond, believes exit on the PM’s terms would lead to a Brexit bounce. BrexitLast but certainly not least, the fate of the economy in 2019 will be determined by how – or perhaps whether - the UK departs from the EU on March 2019. The Bank of England has already outlined a bleak worst-case scenario in which a chaotic departure plunges the economy into a bigger recession than that of 2008-09. Other outcomes would be far less dramatic and the chancellor, Philip Hammond, believes exit on the PM’s terms would lead to a Brexit bounce.
RecessionRecession
Economic growth (GDP)Economic growth (GDP)
EconomicsEconomics
Retail industryRetail industry
Housing marketHousing market
Stock marketsStock markets
Interest ratesInterest rates
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