Economic development and outlook in the UK
Article 5 minutes read

Economic development and outlook in the UK

07 May 2018

The UK is experiencing a period of unprecedented uncertainty. The fundamentals underpinning the UK remain: a globalized outlook, a strong services sector, a large, technical manufacturing base and strong rule of law. However, Brexit negotiations, threatened US trade tariffs and other geopolitical issues such as North Korea and Russia are leading to short-term ambiguity in market and political impacts. Among this uncertainty, some areas, such as tech innovation, are thriving.

Economic outlook

Despite inflation being well above official target of 2% and the Bank of England raising its base rate to 0.5% in November 2017, UK growth is projected to remain modest in the near term. Subdued consumer spending growth and confidence, the drag on business investment from ongoing economic and political uncertainty, negative real wage growth and a faltering housing market have had their impact, however, an export boost, largely driven by the weakened pound has allowed stronger global and Eurozone economies to invest and spend greater amounts in the UK.

Brexit negotiation outcomes are still uncertain, but discussions are starting to provide greater clarity over the likely end state. It is anticipated that Britain will begin to exit from the EU from 2019, with a transition period ahead of full exit. The risk that Britain could leave Europe without cross-sector trade negotiations being concluded should not be discounted. If the future trading relationship includes barriers to trade, then the UK economy is likely to struggle to keep pace with wider growth trends.

On a positive note, the number of people in work increased to 32.25m, pushing up the employment rate to 75.3%, the joint highest level since comparable records began in 1971. And, after a difficult Christmas period, the British high street had a better February, with the first increase in retail sales for three months potentially indicating an improved level of consumer confidence.

Regulatory challenges

A significant amount of regulatory changes are being introduced in the 1st half of 2018, including MiFID II, PSD II and GDPR. Some firms may struggle with full implementation due the scale and complexity of the regulatory changes and requirements. Such a concentration of major regulatory implementation deadlines in the first half of 2018 may divert resources from other priorities. It will also further fragment the market, with different firms implementing the reforms to their own interpretations. Leading political and industry figures have advocated strongly for a reduction in the amount of regulatory change citing the cost of implementation and its impact on business.

In the macroeconomic environment, competitive forces and regulatory change will continue to put pressure on traditional ways of doing business. Strategic questions around business models and locations will continue. Firms operating in the UK, who need to ensure continued EU market access post-Brexit, will build their presence in other EU countries over 2018, but it is likely that the headline numbers discussed during the referendum period will be smaller than forecast. Others are likely to maintain a presence in the UK, but move corporate centres to the EU, for example Unilever recently chose to domicile its corporate headquarters in the Netherlands over London.

Political stability

The lack of progress and clarity in the Brexit negotiations, coupled with worries around the stability of Prime Minister Theresa May’s government, the ‘confidence and supply’ arrangement with the Ulster Unionists and her ability to compromise without losing power are ongoing themes of concern.

Regions and Sectors

Interestingly, London, who’s growth has outperformed other UK regions for most the past 20 years, looks like it will fall in line with the UK average growth rate in 2018-19. The North and Midlands are benefitting from stronger manufacturing growth and decentralisation from London, for example HSBC moving several functions to Birmingham.

Britain’s dominant services sector recorded the fastest rise since May 2017 and should remain modest, but positive in 2018-19. It is likely that manufacturing will mirror this, with momentum maintained after the strong finish to 2017. However, the construction sector has fallen back due to the weakness of commercial property investment. This trend looks set to continue through 2018.

Property

Commercial property investment is being maintained by non-domestic investors, who are attracted to the UK by comparatively low levels of risk, a strong supporting legal framework and strong returns, with prime yields on many UK commercial property sectors being higher than those in much of APAC and Europe.

Storage is a growing issue in the UK, with supply of warehousing at record low levels. Even with huge levels of logistics occupier demand, development has remained muted, with less than 200 sites suitable for large scale units, many of which are under the control of a small number of developers. Companies are having to innovate to circumnavigate this issue, for example a 2m sq ft underground warehouse near Heathrow, the use of decommissioned salt mines and former military bunkers.

The retail housing market is in a downturn, with new buyer inquiries falling for 11 consecutive months and the average number of properties with estate agents dropping to a record low. The Royal Institution of Chartered Surveyors (RICS) March report showed house price increases fell to zero over the last three months, down from a positive increase in January. The north-west of England being the fastest growing, whilst London prices fell by 15%.

Tech

London’s vision is to harness the new technologies the capital has pioneered, to transform London into one of the world’s leading smart cities. At the end of last year, the Mayor of London, Sadiq Khan launched 2 tech initiatives to boost the sector’s progress, saying “London’s tech sector is already the envy of cities across the globe and I’m determined to ensure we become the world’s leading tech hub. This investment and focus in tech is a fantastic opportunity to embrace.”

London is by no means the only city to embrace this – Manchester and Leeds also have strong tech hubs, facilitated and supported by local Council initiatives and Liverpool’s hub is connected to the Isle of Man for tax advantages.

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