UK economy macroeconomic update at the end of March 2019

UK economy crystal ball gazingAmidst the tedious ongoing, protracted and now further extended Brexit process, predicting where next for the UK economy is akin to crystal ball gazing.

So, a macroeconomic update on the UK economy can only be a short term snapshot, from which it may be possible to tease some potential signs for the future although the impact on UK of some global trends make some predictions more certain.

The state of the UK economy after the first quarter of 2019

As ever, we have seen a mixture of positive and negative economic data but it should also be remembered that Brexit is a distraction since the UK economy is heavily dependent on the EU and global economies which have been slowing markedly.

In defiance of most economists, unemployment continues to decline and is at its lowest level for 45 years, and employees are finally seeing modest, albeit recent, above inflation wages growth after many years of minimal wage increases. This has no doubt contributed to the higher levels of income tax and helped narrow the gap between government spending and revenue. Consumer spending has also held up rather better than predicted to help the UK economy.

While the FTSE 100 dropped to 6,584 in December it has since recovered to 7,490 but not yet to its historical peak of 7,877 in May last year. Much of the recovery would appear to be a reversal in economic forecasts for interest rates, which were expected to rise in US and UK but now are projected to remain the same for some time and even may be reduced as some are predicting. As a benchmark the yields on UK 10-year Gilts (bonds) are currently 1.23% up from 0.52% in July 2016, and US 10-year Treasury bonds are 2.58% which is down from their 5-year high of 3.23% in November last year.

The rate of house price growth has been at its lowest for almost eight years and the UK economy expanded by just 0.2% in the latest three months with the Treasury, the Bank of England and the City predicting the weakest growth for eight years for 2019.

Export orders, too, have gone down, with UK export growth falling by 0.8 points to 95.6 in the first three months of the year.

Worrying signs ahead for the UK economy

The UK’s service sector accounts for 80% of its economy and the most recent purchasing managers’ index for February from IHS Markit/CIPS fell to 48.9 in March from 51.3 in February, where any figure below 50 shows a contraction in the sector. Construction, too, remained below 50.

IHS Markit/CIPS is predicting that the UK economy will grow by just 0.8% this year. PwC has also downgraded its GDP growth forecast for this year to 1.1% from 1.6%.

At the end of March, there was some evidence from the REC (Recruitment and Employment Confederation) that employers were scaling back hiring and investment plans.

More concerning is the flight of capital out of the UK with Santander moving spare capital away from its British operations and EY (Ernst & Young) analysis suggesting that banks, asset managers and insurers are opening or expanding their European centres, with 23 companies announcing the transfer of £1trn in assets.

Despite what some might regard as a gloomy outlook, it would appear that prospects for the UK economy are better than those for Europe and possibly than for US.

It will be interesting to see what happens over the next quarter now that extra time has been agreed to sort out the Brexit situation.

Normal business life cannot remain on hold forever, but whatever the outlook we should get on with doing business and not wallow is apathy or self-pity.

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