Underlying strength of UK business is being choked by uncertainty
On 9 September, the UK had a much welcomed good news story, with GDP increasing 0.3% in July. Higher than economic forecasts, this was somewhat unexpected with many thinking the UK may have slipped into a recession as Brexit uncertainty continues.
But don’t jump for joy just yet - the UK avoided recession by the skin of its teeth as shown by the underlyiIng data coming in from various sectors, along with continued negative business confidence. In the ICAEW Q3 Economic Forecast, based on the views of chartered accountants working in every economic sector, we have cut our 2019 growth forecast for the UK economy from 1.5% to 1.1%.
Businesses that we speak to up and down the country are referencing time and time again the need for certainty. Government activities on export growth, productivity rates and payment terms are admirable and absolutely needed - but the economy will not feel the benefits of these activities until businesses have the certainty needed to make proper longer term plans.
For example - according to the latest IHS Markit/ CIPS UK Manufacturing PMI, new factory orders in August contracted at their fastest pace since 2012. For July, the same month where we saw growth in GDP, the UK Manufacturing PMI was at a seven year low with stockpiling increasing. Hit by ongoing trade disputes between the US and China, factories were also seeing European orders fall as supply chains are changed ahead of the 31 October Brexit deadline.
In the service sector, growth was sluggish in August off the back of margins being squeezed and restrained corporate spending. The good news story of a strong labour market is seeing rising wage costs, and overheads are getting higher with increases in energy costs. 2019 so far actually represents the worst performance for the service sector since the 2008 financial crash.
For retailers, footfall has been declining all summer. A glimmer of hope is that online sales are holding strong, saving retail sales from a fairly disastrous May 2019. In that month, retail sales saw the biggest decline on record off the back of unexpected weather. Some of this decline was clawed back in June and July when summer finally arrived.
Optimism in the manufacturing sector in August was said to be at its lowest levels since IHS Markit and CIPS added a confidence question to their survey in 2012. This is similarly reflected across multiple sectors. ICAEW’s own Business Confidence Monitor has seen negative confidence for the past year. As with much of the data above, Brexit and rising input costs are key villains.
There are, however, significant positives underlying all of this negative data, which can be unleased with greater certainty on what the business environment looks like after 31 October. The UK has a remarkably buoyant labour market, with the lowest unemployment rate since 1974, which is propping up consumer spending. Wage growth including bonuses rose at an annual pace of 4% in May to July - outstripping inflation of around 2% - so people have more money in their back pockets. The trade deficit is narrowing as businesses look at their supply chains and reduce the amount of imports. For certain regions around the UK the value from Big Data and AI is starting to show in mid-market organisations and - for now - a weaker pound is benefitting those exporters that do not also import their raw materials.
Businesses are now at the point where the vote in 2016 is largely irrelevant - it is the ongoing uncertainty over our future that has business in a chokehold. The outlook for economic growth in the UK will depend on the way the UK’s departure from the EU is resolved; then initiatives to address productivity and structural issues are more likely to work. When GDP data for August is released on 10 October, will businesses have any more certainty on how their futures look?