Beyond Brexit: what happens after 31 January 2020?
The 31 January will be a watershed in UK history. There will be little obvious change in the weeks and months ahead, however.
This is because an agreed "transition period" means that existing trade agreements and regulations will remain in place until the end of 2020.
In the meantime, the UK and EU must reach new agreements on a wide range of critical issues, including trade, security and freedom of movement. We expect both sides to adopt a tough approach to negotiations.
This could well give rise to concern about a new cliff edge at year end. On balance, however, we think the UK and Brussels will probably reach a limited agreement that avoids significant economic disruption, while deferring some issues until next year.
Although not our base case, it is possible the UK economy enters a technical recession early in 2020. Businesses are sitting on significant inventory, built up in late 2019 when a no-deal Brexit was a real threat. Firms may now opt to draw down this inventory rather than invest in new production, keeping a lid on growth.
In the medium term, greater clarity should lead to some increase in business investment. There are also signs of greater confidence, such as the survey of UK Chief Financial Officers, which signalled significantly increased optimism following last year's election.
We continue to expect modest UK GDP growth of around 1% for 2020 as a whole.
Bank of England ("BoE") on hold for now
The BoE's January meeting was also a watershed of sorts; it was the last meeting overseen by governor Mark Carney. His successor, Andrew Bailey, will be in office for the next monetary policy meeting in late March.
The BoE left interest rates on hold at 0.75% - the right decision, in our view.
However, the UK central bank is far from optimistic on the outlook. It cut its growth forecast for this year and next. It also thinks inflation will remain below forecast.
Still, given our assumption of a gradual recovery in activity this year, supported by increased government spending in the March budget, we expect the BoE to remain on hold in 2020.
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