Guest Spot - Handelsbanken: An uncertain path ahead

4 December 2017

There is no doubt that uncertainty around the Brexit negotiations, what will happen when we finally leave the EU and even which political party will be in power in the near future, are affecting the UK economy at present.

Fears over the future post-Brexit UK have helped to push down sterling against the euro and the dollar, while rising inflation – which reached a five year high of 3% in September this year up from 2.9% in August, according to the Office for National Statistics’ (ONS) Consumer Prices Index – has pushed up costs for businesses, with a rise in food, fuel and clothing import costs in particular.

In early October the Organisation for Economic Co-operation and Development (OECD) warned that the UK now has the fastest growing rate of inflation among the G7 major economies.

The uncertainty is also causing some sectors to postpone investment until the economic picture and future are clearer. One industry this is evident in is construction, which fell in September for the first time in 13 months, according to the latest IHS Markit/CIPS UK Construction PMI (Purchasing Managers’ Index). Economists from IHS Markit do not expect the picture to improve notably over the coming months.

Tim Moore, Associate Director at IHS Markit and author of the IHS Markit/CIPS Construction PMI, said: “Fragile client confidence and reduced tender opportunities meant that growth expectations across the UK construction sector are also among the weakest for four-and-a-half years. At the same time, cost pressures have intensified, driven by supply bottlenecks and rising prices for imported materials”.

“Construction firms attributed falling volumes of commercial work to subdued business investment and reduced risk appetite among clients, linked to heightened economic and political uncertainty”.

Meanwhile in mid-October the OECD said that a decision to reverse the Brexit process, whether through a new referendum or a change of government, would be economically positive for the UK. In a report presented at a conference alongside the Chancellor, Philip Hammond, the head of the OECD said: “In case Brexit gets reversed by political decision (change of majority, new referendum etc.), the positive impact on growth would be significant”.

In the report the OECD also warned that leaving the EU without a deal, something which has looked more likely in recent weeks, could have a very negative impact on the UK economy, with ‘business investment seizing up’ as well as ‘pushing the exchange rate to new lows and leading to sovereign downgrades’.

Yet it is not all bleak. In more positive news, the latest ONS figures revealed that business investment in the second quarter of this year grew by 0.5%, despite the ongoing uncertainty.

Another area where there has been more positive news is exports, which have been boosted by the weaker pound. In the second quarter of 2017 exports rose by 1.7%, while imports increased by just 0.2%.

For some UK companies, what happens post Brexit is not the key factor affecting their future. For example, firms that sell their products and services globally rather than in the UK or those in sectors where there is a constant demand for their products and services even in economically straitened times, may continue to be in rude health and feel optimistic about the future.

Finally, nobody really knows what the outcome will be post Brexit and there are plenty of signs of ‘bullishness’. In September the Centre for Economics and Business Research (CEBR) upgraded its UK economic forecast for 2018. The CEBR is now predicting the UK will grow by 1.6% this year and 1.4% in 2018, up from 1.3% and 1.2% respectively.

The CEBR is also optimistic that the UK will reach a comprehensive interim deal with the EU, which would be welcome news in terms of ensuring greater certainty, at least for the short-term and hopefully longer term too.

In the same September economic outlook Nina Skero, Head of Macroeconomics at the CEBR, said that while “UK economic growth has unquestionably slowed from the rates seen throughout much of 2016, many have mistaken recent headwinds for a full-blown storm”.

Finally even the OECD has admitted that the outcome of Brexit negotiations could be ‘more favourable’ than predicted in its recent report, in fact leading to a boost in trade, investment and growth if a good deal between the UK and the EU is reached. Businesses and households will be hoping that is indeed the case.

For further information please contact Jim on 01935 471928 or email jidu03{at}handelsbanken{dot}co{dot}uk

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