December key indicator – the UK economy at the end of 2018

storm clouds over UK economyAs the end of the year approaches, this month’s Key Indicator looks at the state of the UK economy.

Assessing an economy is not only about facts and figures, it is also about perspectives over time and the effects of business sentiment, and there is little doubt that the country has been facing an uncertain future for the past two years.

Since the Financial Crisis of 2008, the UK economy dropped from being one of the fastest growing of the G7 economies (UK, Canada, France, Germany, Italy, Japan and the US) to being the slowest by the first half of 2018.

The UK economy shrunk by more than 6% between the first quarter of 2008 and the second quarter of 2009 and took five years to get back to the size it was before the recession. Had the pre-2008 momentum been maintained it has been calculated that productivity would have been 20% higher than it actually was at the end of 2017. The size of the UK economy has increased by just 9.7% since its pre-downturn peak according to the ONS (Office for National Statistics).

The impact of confidence – or lack of it – on the UK economy in 2018

It is generally accepted that from large corporates to SMEs, businesses dislike uncertainty since it has a significant impact on their ability to plan ahead with any confidence.  Confidence, or lack of it, also affects the behaviour of investors and lenders when considering investment in growth. This can be seen partly in the behaviour of the stock market, which has been decidedly volatile in the last two years, thanks to three main factors: the ongoing opacity of the Brexit outcome, the potential for a change of government to one that is viewed as anti-capitalist, and the potential consequences of a US trade war with China.

The rapid upturn in markets following the announcement after this weekend’s G20 summit of a 90-day suspension of tariffs to allow for US-China trade talks is a good example of volatile market sentiment.

PWC (Price Waterhouse Cooper) analysis reflects some of this sentiment in its most recent assessment of the UK economic outlook, which expected growth to remain modest at 1.3% in 2018 and 1.6% next year.

IHS Markit/Cips monthly snapshots also reveal levels of confidence among different sectors of the UK economy. Its most recent Services sector (retail, hotels and transport) confidence indicator had dropped from 53.9 to 52.2.

A Dun & Bradstreet survey of SMEs in November also found that 40% felt Brexit had slowed their growth and another piece of research by Deloitte found that only 13% of CFOs were more confident than three months ago and 79% felt that the longer term business environment would be worse after the UK leaves the EU.

Both the ONS and the Bank of England’s most recent assessments (to September 2018) indicated that investment by companies fell by 0.7 per cent in the three months to June, following a contraction of 0.5 per cent in the first quarter and that many businesses are putting investment on hold.

The Investment Association has calculated that UK investors have pulled nearly £9 billion from funds investing in British companies since the referendum.

Clearly confidence is crucial to investors as well as to business planning.

The health – or otherwise – of sectors in the UK economy

As I reported in my latest blog on the quarterly insolvency figures, there is a gradual upward trajectory in insolvencies which accelerated in the third Quarter with an increase of 8.9% on the previous quarter, driven largely by CVLs (Company Voluntary Liquidations) primarily in the construction, wholesale and retail sectors.

Retail sales were down in October and house price growth has been stalling throughout the year and is now at its weakest level since 2012.

However, the fall in the value of £Sterling against other currencies has arguably benefited the leisure and tourism industries since it makes visiting the UK more attractive to overseas visitors. This is borne out by the ONS growth figures for Q3, which showed that rolling three-month growth was 0.6% in September 2018, building on growth in the previous two months.

It has also benefited the car manufacturers, whose exports to non-EU countries increased by £1bn, while imports fell by £1.7bn, in the three months to September. Domestically, however, trade in motor vehicles decreased by 6.2% in September which might suggest a decline in consumer confidence.

The impact of £Sterling devaluation is also reflected in the latest ONS figures, that showed that there has been an increase in UK firms trading internationally by almost 16,000 last year. The total of 340,500 businesses trading abroad represents 14.3% of non-financial businesses in Britain. Non-financial services made up 53.1% of Britain’s international traders. Manufacturing growth also resumed in Q3 after two consecutive quarters of contraction.

Traditionally, the UK’S financial sector has been the strongest part of the UK economy, but there are some worrying predictions on the horizon with the possibility of an estimated 5,000 City jobs being lost, according to the City minister, John Glen, and the Bank of England, and as many as 37 finance firms potentially preparing to relocate to Europe. Indeed, many have already established offices abroad as part of their Brexit planning.

It should be emphasised that both a degree of clarity over the eventual position of the UK economy outside Europe and a longer time perspective are needed to be able to predict the future for the UK economy with any certainty.

But, all in all, the picture at the end of 2018 is decidedly mixed and it remains to be seen whether investment will recover and exports will continue to increase in the coming year.

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