The economy: mostly good news

12 December 2017

When we visited this subject in the last quarter we considered some macro-economic trends and wondered if the science of economic forecasting had become unfit for purpose. The world economic climate is of course closely linked to political events and we seem to have witnessed more of these than usual in 2017. The missile and nuclear bomb tests by North Korea, which were met with equally provocative outbursts on the part of the US President, seem to have had little or no effect on business sentiment and financial markets. Mr Trump continues to bluster and make a lot of noise but so far has found it too difficult to implement his protectionist America First policies; this has been an encouragement to other economies, especially those of Asia – after a few years in the doldrums emerging markets are showing signs of better growth.

Oil prices are now at a two-year high partly due to increased demand, which is the good news, but this is due to threats of political disruption in the Iraq/Kurdistan oilfield, coupled with deliberate efforts by Russia and OPEC to restrict supplies. The saga of Brexit continues to cast a shadow over the UK, due to the slow progress towards a new trade and regulatory regime and the continuing fear of falling off ‘the cliff-edge’ in March 2019. While that is depressing inward investment, especially in flagship industries such as automotive, and creating anxiety in other major industries such as pharmaceuticals, medicines and nuclear, its effects on small enterprise and on employment seem so far to be slight. But both GDP growth and productivity in the UK remain sluggish compared both to the US and the Eurozone.

The UK’s unsatisfactory record on productivity continues to weigh down on living standards. The labour market remains strong with the lowest unemployment rate since 1975, but average annual wage growth at little more than 2% is now outstripped by inflation at 3.1%. The current surge in inflation was initiated by the fall in the value of Sterling in the wake of the referendum result, but since then the Pound has crept back up a bit, relaxing the inflationary pressure. However, other factors have come into play: the Bank of England’s stimulatory monetary policy which it stepped up to counter the effects of the referendum result have accelerated the money supply and credit expansion, and retail sales have grown faster than expected. At 3.1% inflation is now above the BOE’s annual target so in early November the decision was taken to increase interest rates for the first time since November 2006, by 0.25%. The currency markets had already anticipated this so the consequent strengthening of Sterling was unremarkable. We can expect future rises in interest rates, but given the fragile economic recovery these are likely to be small and infrequent.

For those of you who trade with our European partners there is good news in spite of Brexit. The Eurozone has experienced difficult times since the 2008 crash and the Greek debt crisis, but structural and economic reforms have made the economy more robust, and it has benefited from its own version of quantitative easing (which will soon have to start to unwind). As a result, a small recovery which started in 2013 is now gathering momentum. There has been a sustained expansion in manufacturing and services and the European economy is showing a growth rate of 2.4% (compare the UK’s rate of 1.5%). Some commentators continue to highlight Germany’s dominance in this success story but the facts are that recently this growth has been evident across virtually all of the 19 Eurozone countries. The Netherlands has recorded its best growth rate since 2007, France its best since 2011, and Spain is growing faster than at any time in the last two years. Unemployment, though still high at 8.9%, is falling and is now at its lowest since 2009. Of course, political threats continue to emerge and apply the brakes. One Spanish newspaper estimated that the costs to date of the Catalonian constitutional crisis were up to €15bn in lost output. There are also doubts over Angela Merkel’s ability to form a government, and a threat to the Irish Taoiseach’s hold on power.

So, to summarise: the World economy is in better shape than could reasonably have been expected given political events, and our nearest neighbours and major trading partners are doing well. The UK is out of step. It needs a major investment boost to improve productivity. There are record levels of cash around the world being held on the side lines by cautious investors. Some of this will eventually be invested in the UK but not until this country and the EU have found a way of continuing the frictionless trade that both parties have enjoyed for several decades. That could be several years away.

What does all this mean for your business? If you are ambitious for growth and want to develop your export market, or establish operations overseas, now is a good time to take the plunge. While your competitors hesitate and wait to see what kind of deal we are going to get with the EU, there is an opportunity to get ahead. Europe is still a good place to do business. With UHY offices in every European country and in most other countries we can help you to set up in business or forge links with trade organisations almost anywhere in the world. Our partners in UHY International can help you to navigate the financial and regulatory requirements in every jurisdiction. Just give me a call.

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