The Comprehensive Economic and Trade agreement (CETA) between the EU and Canada has also been referenced as a possible blueprint for a trade agreement, but this took more than seven years to negotiate, and was pushed for by France as French is an official language of Canada, so it is unlikely to serve as a framework here.
So, there is much to negotiate and a tight deadline. But what of the domestic policies under the new Boris administration?
Several confidence surveys show a bounce since Boris won his landslide victory in the general election last December. The scale of the majority signals that Boris has the mandate to push through some decisive domestic policies, and it will be these, as well as the Brexit negotiations, that will be key for the fortunes of the UK economy looking forward.
UK survey data shows dramatic bounce
Source: Bloomberg, as at Feb-20.
The Purchasing Managers’ Indices (PMIs) are recognised as one of the best indicators of ‘real time’ economic activity in major economies. In the UK, the construction PMI has a particularly strong link with overall economic activity. On some measures it has the strongest correlation.
The rate of wage inflation has been trending higher and now stands well above 3%. However, there has not been a corresponding increase in productivity and were the rate of wage inflation to increase further, something would have to give: either profit margins would be squeezed or inflation would rise above the Bank of England’s 2% target.
Fiscal outlook is at an inflection point
Source: Goldman Sachs, as at 30-Jan-20.
The cyclically adjusted fiscal stance measures the deficit after removing fluctuations due to the economic cycle, whereby tax receipts decline and unemployment benefits etc. increase when the cycle turns down. It is designed to reflect discretionary changes in fiscal stance: the effect of fiscal decisions on the economy, rather than the reverse.
The chart shows that there has been a huge discretionary tightening of fiscal policy in the last 10 years. Under Cameron and May, the underlying deficit fell from 9% of GDP to 2%. This blunted the recovery from the Global Financial Crisis.
Boris now has the option to reverse much of this tightening. How much will he do? We will find out in the Budget on 11 March, but I expect a substantial fiscal expansion. Much of this is likely to take the form of higher public spending, which typically has a bigger impact on the economy. With the fiscal tool of tax cuts, some people may save their extra disposable income, or spend it on imports, neither of which will boost the domestic economy – but spending on infrastructure has a more direct impact on UK GDP.
This is crucial for Boris: the domestic economy is already weak and the impact of the negotiations with the EU are likely to cause further weakness, so a boost is needed from somewhere.