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UK Industry Report: Q3 2018

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UK Economic Outlook

New government budget announced

On 29 October the government announced its last budget before the UK’s planned exit from the EU in March 2019. As public borrowing had performed better than initially expected, Chancellor of the Exchequer Philip Hammond decided to increase spending in several areas, while simultaneously cutting taxes for consumers and (some) companies.

Additional money was earmarked for the National Health Service, defence and infrastructure investment. Households will benefit from a rise in income tax allowances from April 2019, while workers receiving the minimum wage will see a 4.9% pay increase.

All in all, the budget is suited to provide a (modest) fiscal stimulus - should it be implemented.

Brexit talks remain stalled

Brexit talks between the British government and the EU have still not delivered a breakthrough. A summit planned for November has been cancelled, as insufficient progress has been made on the Irish border issue. With the UK set to leave the EU on 29 March 2019, and with any potential agreement requiring ratification at domestic and European levels, time for a compromise will run out in December at the latest.

Positively, Dun & Bradstreet still forecasts that a deal will be brokered, leading to an at least 21-month transition period, starting from March 2019. During this phase EU law will remain in place, which will facilitate doing business with UK-based counterparts. The long-term future of UK-EU relations is more unclear, with a free-trade agreement between both sides from the mid-2020s onwards being the most realistic scenario.

Global Economic Outlook - World growth above post-crisis average

Despite bouts of market volatility in 2018, our forecasts still indicate a period of stable, global economic growth of 3.0% in 2018, and 2.9% in 2019: above the post-2008 crisis average of 2.0%. Nevertheless, there are marked differences between the country income groups.

For the advanced countries, our forecasts show growth slowing from 2.3% in 2018 to 2.1% in 2019, whereas growth in the emerging economies is set to climb from 4.3% in 2018 to 4.5% in 2019. This will restore the advanced/emerging market growth differential to 2.0 percentage points or more for the first time since the collapse of the oil price (and of upstream commodities demand) in 2015-16. However, within these categories there will also be diverging trends: the US economy will slow, while the UK’s will speed up, provided our central scenario of a negotiated Brexit materialises. Similarly, growth will improve in Brazil while slowing in China.

Potential trade wars continue to threaten exposed countries’ growth prospects, although risks have eased following the signing of NAFTA’s successor, the US-Mexico-Canada Agreement (USMCA, which is still subject to ratification by their three legislatures). Another concern is around signs of a slowdown in China. And the normalisation of US monetary policy, even if lagged by other central banks, will tighten financial conditions and put pressure not just on those governments and businesses which have built up record levels of debt, but also equities, housing prices and household sectors in general.

Yet, we believe the currency crises in Argentina and Turkey, further monetary tightening due in the US, and the early phases of the economic slowdown in China will not in themselves be enough to cause a big shift in the global growth outlook into Q1 2019.

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