No Recession Likely For The United Kingdom: So Say The Analysts
Post-Referendum Gloom and Doom Gives Way to Hope and Prosperity…..
June 23, 2016 will go down in history as the day that changed the economic and political fortunes of Europe, the UK and the world at large. Or will it? The narrative in the lead up to the Brexit vote was perhaps best described as cataclysmic for the UK economy. The Stay Campaign painted a picture of ‘Britain in the Bin’ in terms of housing, employment prospects, job losses, currency depreciation, tourism and political upheaval. But the reality in the 3 months since the Brexit decision has been anything but.
In the weeks following the Brexit vote, British Prime Minister David Cameron gave way to Prime Minister Theresa May. And two weeks ago, the same David Cameron resigned as a member of Parliament for Witney. According to Cameron, ‘… Look, I thought about this long and hard over the summer and I decided that the right thing to do was to stand down as the member of Parliament for Witney… it isn’t really possible to be a proper backbench MP as a former prime minister.’ Cameron’s resignation as an MP hardly made waves economically – the transition to Prime Minister Theresa May and the appointment of Foreign Secretary Boris Johnson, have hogged the headlines.
The Economic Impact Remains Muted
On an economic level, there is little in the form of recessionary data that supports the projections of doomsday analysts. Economic turmoil was promised for the European Union and the United Kingdom should Britain decide to leave the EU. But it is now generally accepted that the BOE (Bank of England) and its governor Mark Carney stepped in at precisely the right time. This sentiment is shared by the OECD (Organisation for Economic Cooperation and Development). The same organisation is somewhat skeptical about the U.K.’s GDP growth prospects in 2017. This is due to the increased uncertainty surrounding a Brexit, and how this will impact upon foreign companies with the UK as their base of operations.
Last Wednesday, it was reported that UK government borrowing had increased above expectations at £10.5 billion in August. City economists had anticipated UK government borrowing of £10 billion. Fortunately, the Office for National Statistics (ONS) also reported that the figure was £900 million less than the August figure for 2015. This has had the effect of reducing the UK deficit for the year (April through August) to £33.8 billion. Year-on-year, this is £4.9 billion less. Over the course of the next 7 months, UK government borrowing will have to be reduced by £21 billion to meet the March budget. The new Chancellor of the Exchequer, Philip Hammond has taken a different perspective than its predecessor, George Osborne. Many economists are anticipating that Hammond will adopt fiscal easing policies when he makes his autumn statement in November. The rather ambitious plan of turning a deficit into a surplus will be rolled back several years owing to the exigencies post-Brexit.
Crunching the Numbers: The State of the UK Economy
Philip Hammond is of the opinion that the UK economy’s resilience will greatly assist with the short-term challenges ahead. There are encouraging signs with the UK labour market, where employment numbers are now hovering at record highs. Even UBS upwardly revised its forecast for UK economic growth. GDP is expected to grow at a rate of 1.9% for 2016, up 0.6% from the previous forecast. For 2017, UBS is anticipating sharply reduced economic growth of just 0.7%. Unemployment remains steady at just 4.9% – an 11-year low. And when it comes to the export market, the GBP is certainly assisting UK companies in a big way.
Currently, the GBP/USD pair is trading at 1.3008, down 0.09% or $0.0014. For the year-to-date, the pair has depreciated by 11.73%, from trading at 1.4789 on 23 June to 1.3235 on 28 June. While this appears to be detrimental to the UK economy, it has helped to turn the U.K.’s economic fortunes around in the export sector. Foreign tourism to the UK is also relatively cheaper, and this is helping to drive up demand for hospitality-related services. It’s not all sunshine and roses for the UK economy however. High-street spending may be rebounding, but the data is premature to start drawing conclusions. Already we are seeing increasing costs of raw materials hitting UK businesses in a big way. Ultimately, these price increases will be passed on to consumers. Import prices are rising owing to a weak GBP.
Slower earnings and sticky wages are being met by higher rates of inflation. In real terms, UK workers’ wages are falling. One of the most glaring austerity measures in place is the cutting of graduate job schemes. The problem is that major business and personal investments in the UK economy are now being pushed back until Article 50 of the Lisbon Treaty is invoked. Investors are simply loath to plough money into the UK economy when they are uncertain how the politicians will negotiate the extrication process. This gives rise to a deflationary spiral where big-ticket purchases are withheld in favour of a wait-and-see approach. For example, residential property purchases recorded little activity in the month of July and August. However, year-on-year they are 6.1% lower.
That the Bank of England decided to maintain interest rates at historic lows of 0.25% when the monetary policy committee met is telling. At the highest level, economic policymakers are convinced that a slowdown is in the pipeline. As such, it is altogether possible that an additional rate cut of around 0.1% is likely. Most everyone agrees that the decisive action taken by the Bank of England had a calming and positive effect on the UK economy. There was no dillydallying when it came to Prime Minister David Cameron stepping down and being replaced by Theresa May, and the BOE was quick to assuage investors at home and abroad. The rate cuts were designed to stimulate economic activity by making it cheaper to borrow money for investment purposes. This was a hedge against the likely slowdown as businesses consider repatriating their operations to Europe. PwC (PricewaterhouseCoopers) analysts took a different approach to the BOE and would have preferred a more substantive evaluation of UK economic performance.
What about Minimum Wage Increases in the United Kingdom?
The shadow chancellor of the Labour Party in the UK, John McDonnell, has proposed hiking the minimum hourly wage to £10, according to McDonnell, the Labour government is invested in everyone earning enough to live on. The Labour Party is attempting to differentiate itself from the Tories at this critical juncture. According to an economics editor from the BBC, proposals by John McDonnell to raise the minimum wage to £10 per hour would result in the lowest paid workers in the UK earning £19,250 per annum. Labour is looking to enforce a comprehensive industrial strategy by intervening in all aspects of the economy. For its part, Labour is hoping to implement a minimum wage of £10 per hour as early as 2020.
Snapshot of UK economic indicators
- Inflation stands at 0.6%
- Services PMI is at 52.9
- Business Confidence is at -47
- Manufacturing PMI is at 53.3
- The GDP growth rate is 0.6%
- The Government to GDP ratio is 89.2%
- The Unemployment Rate Stands at 4.9%
- The FTSE 100 index is currently at 6846
Disclosure: None.