“Many pundits had predicted that the uncertainty caused by the vote to leave would send Britain into recession, with unemployment shooting up and wages collapsing. But the economy has plodded on.” (The Economist, Nov. 2, 2019) 

“UK spending has been materially dampened by increased uncertainties related to the Brexit process. In particular, the proportion of companies that report high uncertainty about Brexit has been elevated and businesses on average expect Brexit to have a negative effect on their sales. Those factors are likely to have weighed on business investment, which — unusually during an expansion — has fallen in five out of the past six quarters. Consumer spending has been more resilient to the uncertainties around Brexit, although these appear to have weighed on some discretionary spending and housing. While household spending has been underpinned by strong real income growth, consumption growth has weakened somewhat and the household saving rate has drifted up over the past couple of years, despite the strong labour market.” (Bank of England Monetary Policy Report, Nov. 2019)

As was the case in the US, even in the face of somewhat slow economic growth., Britain’s job market strengthened last year, and the unemployment rate dropped to a four-decade low of under 4%.  

A glance at the accompanying chart provides one obvious reason why Boris Johnson swept into power in the December election, The election was called at a surprisingly sweet spot in 2019 as real wages escalated up to 2% and the unemployment rate was at a record low. 

As the Economist magazine points out, Theresa May picked pretty much the worst possible time to go to the polls, since in June 2017 when the snap election was held, real wages fell by 0.5%, largely due to a sharp depreciation of the pound. 

Moreover, it was recently hard to accept Jeremy Corbin’s argument that the British economy needed a complete overhaul when the job market was functioning so close to full employment and when real wages were rising. 

Obviously, however, looking forward the outlook is much less rosy for the British economy. Many rational economists worry that the Conservative government win on the promise of a full exit from the EU on January 31 EU will damage the British economy.

For example, the UK forecasting group PWC estimates that UK economy expanded only 1.2% in 2019 and should grow somewhat slower at around 1% in 2020. The long-term average rate of growth of the UK economy is around 2%, so even assuming a rather orderly exit from the EU, the economy is expecting to grow quite slowly in 2020. 

Clearly, the risks for the British economy are more heavily weighted to the downside because of the assumption of an orderly Brexit and only modest business investment negativity. Note in the second chart the decelerating pattern of growth in the UK economy between 2017 and 2019, with deceleration projected to continue this year.  

The importance of relatively strong consumer spending supporting the British economy is also obvious in this chart, especially the slight improvement projected for 2020. 

Strong government consumption growth in 2019 and projected in 2020 helps offset the serious drop in business fixed investment in the UK. Of course, business investment and the housing market in the UK have been on a declining trend since 2017 due to Brexit-related uncertainty.