Brexit and beyond: disorientation or optimism?
by Helena Page, Consultant

The UK’s economy started 2018 disorientated and subdued. A moment of optimism sparked by year-end figures showed an increase in manufacturing output and an uptick in productivity but the rallying of the Pound was soon upset by December’s disappointing retail sales.  This month the collapse of construction giant Carillion has sent a wave of uncertainty rippling through its extensive supply chain and has even fuelled the debate about the future of capitalism.

 

The 2017 turbulence, punctuated by downward revisions in economic forecasts, does not appear to be over.  The ComRes Capital 500 quarterly research for London Chamber of Commerce attests to this: on balance, a quarter of London businesses (26%) expect the Capital’s economic prospects to worsen over the next 12 months, only marginally higher than their expectations for the UK economy overall (with 30% expecting prospects to worsen nationally over the same period, on balance).

 

So what, dare we ask, does 2018 hold for UK business and the economy from Brexit and beyond?

 

  1. Growth is forecast to fall behind the rest of the OECD in 2018, but the global economic boom will help buoy the economy in the short-term.

 

The latest forecasts estimate that UK economic growth will run at 1.4% in 2018, behind the OECD average of 2.2%. This is unsurprising given the combination of a heavy reliance on services to drive the economy (which account for around 80% of UK GDP) and a constriction in the spending power of consumers throughout 2017 due to inflation outstripping stagnant wage growth.

 

This growth might be lower if it weren’t for the ongoing boom in global trade which has defied souring diplomatic relationships and swept the UK with it.  While the uncertainty of post-Brexit trading relationships might hamper the ability of the UK to reap the rewards of this trend, it will at least buy the economy time during a year dominated by the uncertainty of transition negotiations.  Whether Britain can make up lost time, after disturbing relations with its closest and largest trading partner, is a different matter.

 

  1. Despite Brexit uncertainties, solving the UK’s productivity puzzle must remain top of the agenda for policy-makers and businesses.

 

The latest figures for Q4 2017 of the Capital 500 survey indicate that businesses are holding their breath on investment decisions, with the balance figures for those planning to increase investment in training and in plant and equipment remaining relatively consistent since Q4 2016 at around 1%.

 

Lack of clarity over Brexit is the main cause of this in the short-term, but chronic under-investment is a structural one which has plagued the UK since the financial crisis.  Of course, it is hoped that this year’s transition negotiations will, if nothing else, ease the suppression of investment by laying down the outline for the UK’s future relationship with the EU.  But with unemployment at a 42-year low, there’s also an opportunity for the Government to incentivise investment in skills, technology, and innovation in lieu of additional labour which shouldn’t be ignored.

 

  1. The Government needs to perform a geographical rebalancing act to build a more resilient economy for the long-term.

 

Britain’s imbalanced economy is inextricably linked to the sluggish productivity of the last decade. While the latest Industrial Strategy provided welcome platforms for investment in the form of sector-deals, analysis from Centre for Cities shows that this model fails to distribute further afield the concentration of investment in the Greater South-East where cities are 44% more productive than elsewhere.  Cities like Manchester, Liverpool, and Birmingham, which should be helping to drive the economy, were among the 50 of 62 UK cities below the national average productivity in 2015.

 

Certainly, the new powers given to metro Mayors and the various regional growth funds go some way to shift this focus away from sectors to cities. It is now up to these regional leaders in 2018 to secure a package to encourage innovation, build better transport links and improve educational attainment and skills to create the pool of high-skilled labour so attractive to business.

 

Brexit has certainly aggravated economic problems in the short term, namely weak trade and productivity performance, which pre-dated the referendum.  Most commentators seem agreed that the net impact on the economy will be negative at least in the short-term.  However, as Bronwen Maddox of the Institute for Government commented this month, while staying alert to the very real challenge of Brexit ahead, the Government must avoid encouraging ‘Brexit Eclipse’ only to be blind-sided by equally profound issues beyond Brexit.

 

Even more optimistic is Vivienne Stern, Director of Universities UK International who, while not underplaying concerns about leaving the EU, sees possible upsides – for example in the relationships to be forged with non-EU advanced economies.  It is that can-do mentality, and a desire to find the upside in what in many respects is a period of considerable uncertainty, which every business needs to take on if the UK is to turn disorientation into advantage.

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