The UK is changing now, can you afford to wait for Brexit?

Look beyond the headlines…

The EY ITEM Club Spring forecast for the UK economy is for GDP growth of 1.8% this year. At first glance, this forecast, which is in line with last year’s out-turn, suggests that it is steady as it goes for the UK. This view may at least in part explain why the Government has avoided taking any dramatic action to head off the risk of an economic slowdown.

…because the UK economy is changing…

However, the similar headline growth rate for 2016 and 2017 masks a shift in the balance of demand associated with the fall in the exchange rate that accompanied the result of last year’s referendum. The UK economy is already adjusting to prepare for life outside the EU: as a result, the domestic outlook is weakening while export activity is increasing.

It is not just the balance of the economy that is changing. The forecast sees overall growth gradually slowing during the course of this year. This loss of momentum continues, leaving 2018 and 2019 looking weaker at 1.2% and 1.5% annual growth respectively.

Business investment & GDP

…with slowing domestic demand…Consumer income & spending

The retail sales figures suggest that, as predicted in the recent EY ITEM Club special report, consumer spending is now slowing down as inflation and other headwinds sap spending power. The rise in retail sales volumes in February was the first increase since last October but on a three-month-on-three-month basis, sales were down by 1.4%, the weakest performance since March 2010. As the EY ITEM Club notes, absent an unprecedented rise in sales in March, the first quarter of this year will deliver the first quarterly retail contraction since 2013.

…but faster global growth…

There has been more positive news in recent months from all of the major economies of China, the USA and the Eurozone:

  • Back in 2015, China was at the centre of global concerns, with worries that a financial crisis would spill over into the other emerging market economies and hit the main engine of world trade. Although worries about China persist, the authorities seem to have a grip on the situation and the commodity markets and emerging market economies have been recovering.
  • The financial markets welcomed the new US administration, with the stock market up to new highs and the 10 year bond yield up nearly 70 basis points before falling back. This ‘Trump bump’ has been echoed in consumer and business – especially small business – confidence.
  • Economic activity has picked up in the Eurozone, inflation has recovered somewhat and the recent forward looking indicators were positive. It appears that the bloc could record its strongest GDP growth since the Eurozone crisis in 2017.

As a result, world industrial production is growing at its fastest pace in seven years, and the surveys suggest that this pace will be sustained well into this year. Moreover, there is positive momentum in many emerging markets as commodity prices have recovered.

…means businesses now need to adjust their plans…

The UK economy has performed better since the referendum on EU membership than some organisations, such as the Bank of England and HM Treasury, forecast. This, together with uncertainty over the specifics of the upcoming negotiations between the UK and the 27 other remaining members of the European Union, has in my view, created a “wait and see” mind-set among businesses.

However, as we can now see the shape of the UK economy changing, waiting is not an option. In particular, there is a need to evaluate the balance of resources between domestic and external activities.

…shoring up domestic activities…

It will clearly be difficult to generate support for investment in a slowing domestic market but a changing economy means action is needed. European immigrants have provided much of the extra labour employed by UK business in recent years, but many are already going home as a response to the referendum vote and the subsequent devaluation. This could prove to be a major headache for employers over the next few years, underlining the need for more investment in education, skills and training. Investment in robots and other labour saving machinery could also help in dealing with this problem.

…and moving to exploit emerging opportunities.

The global outlook is improving and the UK Government has made clear its desire to make the UK more successful in the world economy. This means that investment will be needed both to build new export capacity but also to rebuild the domestic supply chain. There are risks in internationally oriented investment but with faster global growth  and a strong desire by HMG for the UK to sign new trade deals, it is important to start analysing the opportunities now.

Find out more and download the complete forecast

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