UK economy current status

22 January 2019

UK economic growth has probably slowed down. Recent purchasing managers’ surveys tell us that growth in both manufacturing and services has slowed to its lowest rate since just after we voted to leave the EU in June 2016.

It is tempting to blame this upon the increased uncertainty caused by the Brexit negotiations: the possibility of us leaving next year without a deal has caused some companies to delay investment or expansion decisions. Whilst the general view amongst economists appears to be that Brexit is one of the sillier economic ideas, it is by no means our only problem. There are several others.  Among these are:

Key problems for the current UK economy

Slower demand overseas: in the eurozone, purchasing managers say that growth has slowed to close to a four-year low.  In China, manufacturing activity is currently shrinking. And even in the US growth appears to be slowing, albeit from a rapid pace. Monetary growth in both China and the eurozone has slowed in recent months. This is consistent with both economies experiencing a normal cyclical slowdown, as well as the effects of the US-China trade war.

A debt overhang: Bank of England figures show that consumer credit growth has slowed to a three-year low. This is a sign that some people are using their (so far very modest) pay rises to reduce their debt. To the extent that this continues, it suggests that consumer spending won’t grow as fast as pay. This doesn’t just point to slow demand growth, it also implies that profits will be squeezed as companies don’t recoup higher wage costs through higher demand.

A weak housing market: both the Halifax and RICS have reported that house prices are falling and that demand for housing is weak, while Bank of England data shows that mortgage approvals are flatlining at only half their pre-crisis level.  While the former is not catastrophic, as it means young people have the hope of homes becoming more affordable, the latter is a drag on the economy since it depresses demand for housing-related items such as furniture and carpets.

A lack of investment: business investment is lower than it was two years ago. This is only partly due to businesses putting projects on hold until Brexit uncertainty is resolved. Many other things are holding investment back, such as the fear that future technical change will render today’s investments obsolete, the realisation that past investments have perhaps been motivated by overconfidence and the scarring effect of the financial crisis. None of these factors will disappear soon.

Stagnant productivity: the office of national statistics (ONS) says that output per hour fell by 0.4% in the third quarter, which suggests that the rise in productivity earlier this year was just a blip. If, as is likely, productivity growth stays weak, then real incomes won’t grow much.  The only uncertainty is whether it will be wages or profits that suffer the most pain.

If Brexit uncertainty is resolved satisfactorily, we might enjoy a brief upturn in growth as businesses enact postponed investment plans.  However, we shouldn’t get carried away just yet as there are good reasons to expect slow trend growth.

Source: Investors Chronicle https://www.investorschronicle.co.uk/chris-dillow

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