An economic outlook for 2019

11 Jan 2019  |  Matthew Bloxham 
An economic outlook for 2019

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Bloomberg Intelligence's Matthew Bloxham outlines his expectations for media and advertising in the year ahead

For businesses in the UK, the year ahead, more than any other I can remember, will be defined by one single event: Brexit. The UK economy has been in something of a holding pattern since markets made a sharp correction immediately after the referendum vote in mid-June 2016.

As many of you were boarding planes to fly back from Cannes Lions, the pound was dropping – falling almost instantaneously by 10-15% against both the dollar and the euro. It has slipped a further 5% or so in the following two plus years as the reality of Brexit sinks in.

I think it's fair to say that the risk profile for the pound from here is asymmetric. There's a lot more downside potential from a bad outcome than there is upside from a good one.

Interest rates have bounced around a bit, but broadly speaking the yield on 10-year government borrowing has stayed within a narrow corridor of 1.0-1.5%. The Bank of England has been signalling a need to push rates higher to stave off inflation. But most observers expect rate rises to be put on hold in 2019 if the U.K. ends up in a no-deal Brexit scenario.

Real growth in GDP has been surprisingly buoyant. We haven't seen the big slump in economic expansion that some predicted following the mid-2016 vote to leave the EU. And the U.K. is still outperforming most of our European neighbours, and by some distance.

But we have started to see the pace of growth in real GDP slow in 2018, from about 2% a year to about 1.5%, with leading indicators pointing to more pressure in 4Q.

Whatever the outcome of Brexit, GDP growth is likely to slow further before it recovers - reflecting a prolonged period of decline in the level of investment by U.K. businesses.

Source: Office for National Statistics

Projects, big and small, are being put on hold thanks to the uncertain outlook and the short term impact will probably become more pronounced if Brexit gets delayed beyond the official March deadline.

The media landscape

Media companies and commercial teams have been experiencing this first hand in their daily interactions with clients. Unfortunately, when we do eventually get some certainty on Brexit, whatever that certainty is, the media sector is probably going to have to wait a while before any growth in business investment translates into materially higher marketing spend.

Bloomberg journalists Kasper Viita and Kita Rees note that throughout Europe, stocks reliant on advertising struggled in 2018, despite a year that saw a number of events boosting growth, including the Winter Olympics and the World Cup. Rarely out of the headlines, new management at WPP Plc failed to halt last year’s plunge and ended 2018 down by more than a third, German broadcaster ProSiebenSat.1 Media SE has declined 44% and ITV Plc has dropped 22%.

The struggle is partly a result of clients cutting back on ad spending and going straight to online platforms, meanwhile consultants are increasingly encroaching on traditional ad agency turf. Digital advertising will solidify its position as the world’s biggest ad platform in 2019 with $285 billion, topping TV for the third year in a row, according to forecasts by Magna Global.

We expect another tough year for media and ad agencies in 2019 as multiple threats will continue to contribute to a tough trading environment. Expect some deep-pocketed, non-traditional buyers, including consultancies, to be active in M&A as they look to beef up their capabilities.

Source: Bloomberg

This slide provides a snap shot of what all the economists, great and good, think about the outlook for growth in 2019. It's based on a regular Bloomberg survey involving 50 or so participants.

You always need to take economist forecasts with a pinch of salt though. And never more so than now, given nobody has a clue what's going to happen on Brexit and how the UK will adapt to our new situation. Whatever that may be.

It's worth highlighting two common factors that are relevant for the media industry whatever the outcome. First, the squeeze on the labour pool, which adds to the challenge of retaining the European talent that's been adding value to UK businesses and is feeling increasingly fed up with life in the UK.

Second, the need to be less reliant on Europe as a source of business opportunity. The UK media industry needs to re-tool to help its customers tap opportunities in Asia and beyond.

A week away from the Common's vote on Prime Minister May's deal and the markets seem to have very little conviction on the likely outcome. This is clear from Bloomberg’s proprietary indices that track the betting odds on the various scenarios. As I write this, the bookmakers are offering 5/1 on a no-deal Brexit, and 5/2 odds on both a second referendum and a version of the deal on the table being secured by March 29.

The biggest conclusion from the current uncertainty is that, more than ever, you shouldn't be worrying about what you can't control."

Given the lack of preparation for a no deal Brexit, it seems almost inevitable that it would result in some degree of short term economic paralysis. But how long this would last, or how severe it would be is very difficult to predict. We simply do not know how the U.K., or the EU would adapt their positions to minimize the impact.

Prime Minister May’s deal looks to mimic as closely as possible the current arrangements with the EU, but even the government expects it to create some drag on growth.

A deal of some sort by March should help businesses to start thinking about future plans though, spurring some expansion in investment, but interest rates would probably also rise to ward off the threat of inflation. It could also trigger a more pronounced exodus from the City, a major source of tax income.

A delayed exit, whether it's to run a second referendum or an attempt to negotiate a better deal with the EU, would inevitably prolong uncertainty, keeping business investment subdued with the potential to put a bigger squeeze on growth in real GDP.

The biggest conclusion from the current uncertainty is that, more than ever, you shouldn't be worrying about what you can't control. You should be focused on making your business the best it can be. Because that will define your success in both good market conditions and bad.

Beyond the keener focus on talent retention and geographic refocusing referenced earlier, if you want to succeed, then you need to be showing your clients real leadership, you need to be increasingly flexible in your approach to doing business, and you need to be able to execute change at speed.

The recent malaise affecting some parts of the traditional media industry is at least partly attributable to companies losing their way on one of more of these attributes. More nimble competitors from the technology and internet sectors have filled the void.

It's time for the industry to get back on the front foot. The media and marketing sector has long-nurtured an enviable reputation for its innovation and creativity - it’ll need to tap into both over the next 12 months.

For those able to look through the chaos and confrontation, there will be plenty of new opportunities. Let’s make 2019 a year to celebrate.

Matthew Bloxham is a senior analyst at Bloomberg Intelligence

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