The Office for Budget Responsibility (OBR), the UK government’s independent forecasting body, has issued a new edition of its regular Fiscal Risks Report.
This includes interesting content, relevant to grocery businesses. Chapter Nine examines climate change as a threat to economic performance and fiscal outcomes. Specific risks referred to include:
- Ecosystem impacts, especially to soil
- Increased likelihood of both floods and droughts
- New agricultural pests and diseases
Chapter Ten includes extensive discussion of what “no-deal” Brexit might mean for the UK economy and (especially) for UK government finances. This is based on one of the “no-deal” scenarios provided by IMF in April 2019 – it is the more moderate Scenario A (Scenario B is pessimistic and assumes border disruption and severe impact on financial markets).
What "no deal" Brexit might look like
Key economic assumptions made by OBR for "no deal" Brexit include:
- New tariffs adding 4% to import costs once a permanent tariff regime is implemented
- Non-tariff barriers adding 14% to import costs for goods from the EU
- Net immigration to fall by 25,000 per year until at least 2030
- Sterling value to fall by 10% at once, recovering slowly, but remaining 5% lower in 2024
- Equity prices to fall 5% at once, before recovering slowly
- Year long recession from end of 2019 – GDP to fall 2.1%
- Small increase in unemployment
- Significantly weaker real wages
- Increased inflation, in two “steps”, once after Brexit and another as the permanent tariff regime arrives
- House prices down 10% between 2019 and 2021
Possible household impacts
OBR emphasises that these ideas are meant to build a fiscal scenario, rather than being intended as a forecast. Even so, the assumptions are presumably considered credible - they would be of little value otherwise.
The recession projected by OBR would see real GDP falling by about 2%, somewhat less severe than the recession of 2008-09, but roughly equivalent to the recession of the early 1990’s.
For household-facing businesses, income is a key issue, since this influences confidence and expenditure. The chart below shows a comparison of average earnings change between “deal” and “no-deal” scenarios.
“No-deal” is expected to leave earnings below where they might have been under “deal” (caution – we are comparing one projection with another). The difference in 2023 would be £13 pw or £676 pa at current prices.
This would not necessarily manifest evenly across the economy, however. We should anticipate that the experiences of workers will vary according to job role, employment sector and so on.
“Real terms” impacts would be amplified by inflation, which tends to erode the benefit of wage growth. Inflation under “no-deal” is expected to be higher, creating further impact on workers.
In “real terms”, average wages under “deal” conditions are expected to grow by about 7% between 2019 and 2023, but by only 3% under “no-deal”.
Neither prospect is very exciting, especially since the UK has already faced 10 years or more of wage stagnation.
Unsurprisingly, economic turmoil and the disruption associated with “no-deal” Brexit would likely see a sharp downturn in household consumption – not good for retailers, many of whom are already struggling for growth.
Food and drink would not necessarily be affected to the same extent as car retailers, for example, but a downturn in household demand is unlikely to leave them wholly unscathed.
What does this mean for IGD retail forecasts?
IGD issued several possible forecasts for the growth of the UK grocery market in June 2019.
The “mid-growth” scenario assumes that the UK leaves the EU with a reasonably favourable deal and so it is aligned with current OBR forecasts (from March 2019).
The “low-growth” scenario assumes disorderly “no-deal” Brexit and so, if no-deal does occur, then market outcomes are more likely to follow the “low growth” IGD forecast.
James Walton Chief Economist
The EU has granted a delay and Brexit will now be on 31st October 2019, or earlier if the Withdrawal Agreement is passed. This Brexit Snapshot updates businesses on recent changes and guidance
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