25 August 2017
Those of us who manage or own small or medium-sized businesses and whose shares are not quoted on the Stock Exchange probably think that we have enough to do without worrying about the economy. We use our intuition to make routine decisions and, before we make any major investment choice, we probably look in a bit more depth at our markets and run a financial model with a what-if analysis. But we are all affected by economic forces: interest rates influence our ability to borrow funds, inflation affects the salaries we pay our staff, currency exchange rates dictate export pricing, commodity and energy prices feed through to our bottom lines and customer confidence may boost or constrain our expansion plans.
Sometimes though, it’s useful to look at the broader economic forces and where they’re taking us. What might be unsettling to know is that many leading economists are now saying that the state of the world economy is unprecedented, to the extent that the science of economics can no longer predict outcomes.
Recent statistics
Considering just the performance of the last quarter: the Eurozone continues a programme of quantitative easing (QE) and is now enjoying a sustained period of expansion, jobs growth and rising stock markets. Investment has been encouraged by pro-Europe election results in France and the Netherlands. Growth in GDP[i] is 2.3%. The US economy is showing robust growth (2.6%) and the government is applying a steady process of monetary tightening to reverse years of QE.
The picture in the UK is mixed. GDP growth has fallen to 1.2% but the Stock Market has not responded negatively to recent political turmoil. The weakness in Sterling, caused by the EU membership referendum, has boosted export orders and the Purchasing Managers Index has risen to 55.1 (indicating an expansion in activity). Inflation, however, continues to rise, also due to the fall in the value of the pound.
An uncertain future
Looking ahead the position is less clear. Economists are predicting steady growth in the world economy while also emphasising deep-seated problems. There’s a growing wealth gap in developed countries between the affluent and the average working family. The scapegoat for this set of circumstances is globalisation (the free movement of capital, goods and people), which explains the growing popular support for protectionism in the UK and the US.
Globalisation and automation
Globalisation has brought benefits for many in developed countries due to the availability of cheap imported goods. However, the parallel emergence of new technologies and automation has kept wage inflation low so the rise in the standard of living is not what could have been expected. Automation has worked to reinforce the effects of globalisation. Leading companies in the developed world, seeing their market share threatened by cheap imports, have responded by accelerating the automation of their processes while reducing staff numbers. Less resourceful companies have either gone out of business or survived by keeping wages low. The successful companies have expanded and many have become global giants, at the same time attracting widespread mistrust and disapproval.
These companies do not readily share their wealth with their employees; in fact a number of them have amassed vast fortunes in tax havens, taking out of circulation wealth that could otherwise have been available for governments and consumers to spend and put back into the economy.
The outlook for jobs
Historical periods of significant automation, especially those in the second half of the twentieth century when rates of economic growth were higher, led to those people who lost poorly-paid jobs finding better, higher-quality employment. The current expansion of automation has not yet had this beneficial effect, and economists are still hypothesising about the reasons. One theory is that much of it is software-based. Not many people are required to write software and large-scale capital investment is not necessary for the creation of huge worldwide corporations which are selling little more than intellectual property. So the higher-quality jobs are not being created in sufficient numbers. This trend will continue. For example, due to the rapid development of artificial intelligence, within 10-15 years most vehicles will be autonomous. (See my colleague Glenn Thomas’ blog of 22 June). What jobs are we going to find for those who currently drive for a living – in the UK 297,000 taxi and private-hire drivers and 285,000 drivers of goods vehicles? Of course, with an ageing population there will be an almost insatiable demand for care workers, and more available leisure time will probably increase the need for workers in the hospitality sector – but these are traditionally low-paid jobs that most of the population find unappealing.
Uncharted waters
In summary, we have a situation which has no historical antecedents and many eminent economists are admitting that economics may not have the answer. We can expect that matters will resolve themselves, but no-one can predict what the world economy will look like in ten years’ time or what political upheavals will necessarily take place in the meantime. As we know uncertainty is not good for business. If there are lessons to be learned they are to invest in technology where appropriate, apply an analytical approach to major investment decisions but, above all, not be fazed by what may be a succession of political and economic shocks.
What you have just read is merely a collection of opinions. If you would like to contribute your own theories or disagree with mine why not follow us on Twitter or tweet your own ideas?
[i] Measured as the annualised percentage increase since Q1
If you have any questions regarding this blog, contact me or your usual UHY adviser.
