GDP expected to slow throughout 2019

GDP expected to slow throughout 2019

The rate of UK inflation and economic growth will be below average in 2019, with the Bank of England powerless to help, according to John Greenwood, chief economist at Invesco.

Mr Greenwood pays particular attention to the speed at which money is moving through the economy, which economists call the velocity of money.

If the velocity of money is low, then this means capital is being hoarded as banks or consumers are reluctantly to borrow or lend, due to a lack of confidence about forthcoming economic prospects.

Mr Greenwood said that bank lending has declined sharply in the UK, and this will slow down the level of economic growth in 2019, as he predicted growth to hover around the 1.3 per cent mark.

The Bank of England recently upgraded its forecast for UK economic growth for this year to 1.5 per cent, having previously expected the economy to grow at 1.2 per cent.

It stated real income growth, that is, growth in wages after inflation, was behind the stronger than expected performance of the economy.

Rising incomes would mean consumers may not need to borrow, and render the decline in the velocity of money less important.

But Mr Greenwood said the savings rate among UK households has also declined, indicating that people are funding the extra consumption by saving less, and when the savings run down, consumption falls.

The lower level of velocity of money also means inflation is likely to be very low, according to Mr Greenwood.  

In a quarterly update for clients of Invesco he wrote: "In normal times such low growth rates would have been ringing alarm bells in policy circles, prompting urgent corrective action.

"However, the political and economic forces unleashed by the Brexit saga are such that the BoE is unable to turn things around on its own.

"Having played the primary role in restoring the British economy to growth after the slump of 2008-09, monetary policy has had to play second fiddle to the policy-makers in Downing Street and Westminster since the referendum.

"Consumer and business confidence and hence the rates of growth of spending in the economy have been knocked back severely by the on-going uncertainties of the tussle between London and Brussels over the future of the UK after Brexit.

"Consequently it is only feasible to forecast a meagre 1.3 per cent real GDP growth for the year, well below the long-term potential growth rate of the economy."

The Bank of England has previously stated its view that the UK’s long-term potential rate of growth within the EU is 2 per cent and outside 1.5 per cent.

Azad Zagana, senior European economist at Schroders, is skeptical about the Bank of England’s analysis.

He said one of the reasons growth has been stronger than expected in recent months has been stockpiling by firms and individuals, but this serves simply to bring growth forward from the future, so the future growth rate will be lower as people use the surplus goods they bought now, in the future, so don’t need to spend as much then.