The Bank of England’s November dashboard

We’re likely to see the Bank of England nudge down its growth forecasts for 2020 this week. That’s partly down to weakness in the global economy – the Bank’s August projection for 1.5% eurozone growth next year looks particularly optimistic relative to our own forecasts.

But the bigger challenge to the UK outlook in 2020 comes from investment. The BoE already expects capital spending to fall again next year, and it’s possible policymakers lower these forecasts further this week.

The key question is what happens if a Brexit deal is approved by Parliament early next year. That’s what most believe will happen if the Conservatives gain a majority in December’s election. BoE Governor Mark Carney suggested last month that ratification of the Brexit deal could translate into a “rebound in some” investment.

However we are less convinced. Even if the deal is ratified and the UK leaves the EU by the end of January, focus will quickly shift to the transition period. This standstill phase, where the UK’s trading relationship remains unchanged, will last until the end of 2020. But this almost certainly won’t be long enough – either to agree a new trade agreement with the EU, or to set up the necessary border infrastructure and staffing required to keep shipments flowing.

Prime Minister Boris Johnson will need to sign up to EU budgets beyond 2020 to unlock the extension most believe is necessary, and this will undoubtedly be controversial. That needs to be resolved by the end of June for the transition period to be extended, otherwise the UK (with the exception of Northern Ireland) risks leaving the single market and customs union at the end of next year – a result that for most firms will be fairly indistinguishable from ‘no deal’.

In the meantime, this uncertainty will keep a lid on investment.

The persistent Brexit uncertainty is also beginning to take its toll on the jobs market. A lack of investment means new order levels have fallen, including in the service sector where a lower appetite to expand means less demand for things like finance/professional activities. With less capacity required, demand for new hires is slipping.

It's still early days, but vacancy levels have declined consistently through 2019, albeit they still remain high by historical standards. Employment growth fell in the three months to August, and what is particularly striking is that the total number of employee jobs has fallen marginally so far this year. In both the manufacturing and service sectors, the recent PMIs suggest firms are actively beginning to make redundancies.

All of this, in turn, poses questions for wage growth. Accelerating pay growth has been at the centre of the Bank of England's hawkish rationale over recent years, but that could begin to change if slack continues to emerge in the jobs market.

However it's worth remembering that the recent rise in wage growth has not solely been driven by cyclical factors. Structural constraints are at least partly to blame for the skill shortages in various UK sectors. In some cases, demographics (high rates of retirement) are reducing the pool of available workers. In others, the noticeable reduction in incoming EU citizens citing "work" as their reason for movement, is reportedly leading to staffing problems. Neither of these challenges are likely to disappear imminently.

For now, we expect the Bank of England to retain its constructive view on wage growth, although we may see a greater emphasis on the risks to the jobs market at this week's meeting.

Having said all of the above, we still expect the Bank to notionally retain a tightening bias – a reminder that if Brexit ultimately goes smoothly, rates still may need to rise.

Realistically, this is unlikely to happen any time soon. But the fact that the BoE is maintaining a tightening bias at all, does hint that policymakers are – and will likely remain - reluctant to follow the Federal Reserve and European Central Bank in the direction of policy easing in the near future.