Outlook for the UK Economy: Slow growth ahead?

08 February 2019

While the UK has recovered since the financial crisis, growth has been rather sluggish and has largely been dependent on getting more people into work rather than improved productivity. There is a strong consensus that the outlook for the economy will remain unclear for the foreseeable future, given the uncertainty surrounding Brexit.

GDP only grew by about 1.3% in 2018 – far below trend, but better than had been feared by some commentators. Growth is expected to pick up slightly in 2019 (perhaps to about 1.6%), boosted mainly by short-term stock-building as businesses take precautionary steps to protect their supplies and by a modest increase in government spending.

Better prospects for consumers?

Consumer spending has been squeezed in recent years but pressure on households has eased slightly as inflation has fallen back towards the 2% target. There is a concern however, that any pick-up in spending is likely to be based on a fall in household savings or increased personal borrowing, thus building up future problems! At the same time, with record high employment and with unemployment at or close to a 43-year low (4.1%), some labour shortages are evident, particularly in the agriculture and health sectors. Consequently, some upward pressure on wage rates is expected in the months and years ahead.

Disappointing productivity and investment spending

Business confidence and investment spending have remained exceptionally weak in the face of continuing Brexit-related uncertainty. Some businesses have scaled back investment in the UK and some have moved all or part of their operations overseas. ‘Investment is the engine of growth’ and so this development is a serious cause for concern. Confidence in the corporate sector is unlikely to strengthen in the coming months given the many uncertainties surrounding our future relationship with the EU. A worry is the fact that labour productivity growth has been disappointingly slow and now lags many other major economies. Official statistics indicate that UK output per person per hour is currently at 16% below the average of the other G7 countries. Below-trend GDP growth coupled with persistently low productivity growth has critical implications for future government tax revenues and thus longer-term government spending plans. Looking further ahead, however, it is hoped that we will see some modest pick-up in business investment spending as corporates invest in automation in order to compensate for labour shortages and to boost labour productivity.

"…… it is hoped that we will see some modest pick-up in business investment spending as corporates invest in automation in order to compensate for labour shortages and to boost labour productivity."

A slow down in the housing market

There are signs of a slowdown in activity in the housing market particularly in southern regions and especially in London. Latest market reports indicate that house price growth, on average, is the weakest since early 2013 and, while the volume of sales has been stable in recent months, there may well be a softening in 2019.

Last August, the Bank of England raised interest rates for the first time since 2009 – up from 0.5% to 0.75%. Any further increases in the official base rate are expected to be gradual and clearly communicated with the Bank signalling that the pace of normalisation is likely to take several years to achieve.

Government finances continued to improve

Over the past year there has been a faster-than-expected fall in public sector borrowing. This has allowed the government to announce a significant increase in NHS spending along with some further relaxation in austerity measures. With the continuation of historically low bond yields, the government has some room to support the economy in the difficult months that lie ahead.

In conclusion

Uncertainty around the UK’s future trading relationship with the EU will dominate the economic outlook for some time. This is bad from a business planning perspective. The resilience of the economy to global and regional supply chain disruptions will be critically tested in the months ahead.

by Professor Joe Nellis, Cranfield School of Management

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