It is full speed ahead towards formally exiting the EU on January 31 after MPs voted on Wednesday to overturn all five amendments to Boris Johnson’s Withdrawal Agreement Bill proposed by the House of Lords. In doing so, parliament has cleared the way for an official exit at the end of the month. But political events this week highlighted the delicate statesmanship and hard-ball tactics the UK government will face as it negotiates trade deals with the EU and US.
For example, the UK’s proposed digital tax has riled US officials, with treasury secretary Steven Mnuchin saying it unfairly discriminated against US companies. He has threatened retaliation through “arbitrary” tariffs on UK car exports to the US if the 2% levy is imposed on tech companies in April. In Brussels, the focus is on a showdown with the UK on access for UK companies to the single market after chancellor Sajid Javid insisted there will be no alignment with EU standards. As one EU official said: “The more aligned Britain's rules are with the EU's, the better access it will have to the EU's single market."
Meanwhile, the outbreak of the coronavirus in China has sent shockwaves through markets and led to an unprecedented lockdown of three Chinese cities, with transport links closed to try and prevent the spread of the virus. It has also cast a shadow over business prospects in China in the coming months.
Despite all this, the news flow in the UK this week was largely positive. On Monday, the International Monetary Fund (IMF) said that the UK was likely to be the fastest growing economy in Europe both this year and next, with growth of 1.4% in 2020 and 1.5% in 2021, assuming “an orderly exit from the European Union at the end of January followed by a gradual transition to a new economic relationship”. On Tuesday, the Office for National Statistics (ONS), revealed that UK employment hit another record high, with those in work increasing by 208,000 in the three months to November to a record 32.9m, far exceeding the increase of 110,000 that had been forecast.
The pace of pay growth fell flat, however, at an annualised rate of 3.2% – the same as the previous quarter and below the 3.9% level in the three months to July, which was the highest since 2008. Unemployment stayed at its 45-year low of 3.8%.
In a particularly welcome development, UK manufacturers reportedly became far more optimistic about the outlook for their businesses in the three months to January. The Confederation of British Industry’s (CBI) industrial trends survey reported that the proportion of manufacturers expecting business to improve was 23% higher than the number expecting conditions to deteriorate. It is the highest level of optimism since 2014. In the previous quarter, pessimists outnumbered optimists by 44%, and the turnaround since the last quarter is the biggest swing in sentiment ever recorded by the CBI. Accompanying the increased optimism, more companies also said they were looking to invest to increase capacity. The upbeat view comes despite a fall in new orders and output during the quarter. Taken together, the news this week appears to reduce the odds that the Bank of England will cut interest rates at its meeting on January 30.
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