Is the UK economy stable?

Is the UK economy stable?
November 29, 2016 Lauren Howells
The UK economy

Over the past 12 months, the UK economy has undergone some big changes, including the Brexit vote.

Every day, we see many different news stories. They use the same statistics to reach different conclusions about the future of the UK economy.

But how stable is the UK economy?

With potentially more uncertainty ahead as we enter 2017, CashLady takes a look at a variety of different expert opinions on the UK economy.

What affects the UK economy?

A wide range of different things can impact the UK economy but the biggest factor this year has been the decision to leave the EU.

But it is not just what is happening in the UK that can affect the UK economy. Events happening all over the world can impact it, too.

What indicators do we look at to find out if the UK economy is stable?

We can look at things such as the strength of the pound, interest rates and inflation to see how stable the UK economy is.

What do the experts say?

stability of the uk economy

Professional services firm PwC

Earlier this month, PwC released a report detailing their view of the UK’s economic prospects post-Brexit. In their report, they said that the UK economic growth held up better than expected immediately after the Brexit vote. They predicted that growth would average at around 2% in 2016.

However, PwC projected that UK growth would slow to about 1.2% in 2017. There is because there is political and economic uncertainty following the Brexit vote. PwC believe this could mean that there will be less business investment.

Their economy report also suggested that consumer spending growth would slow to around 2% in 2017. This is because the weaker pound will push up import prices and squeeze the spending power of households. Inflation is predicted to rise well above its 2% target rate by late 2017.

PwC said that this slower growth would mean higher public borrowing over the next few years.

PwC’s analysis resulted in them saying that they did not expect there to be a recession in 2017.

Centre for Economics and Business Research

The Centre for Economics and Business Research have warned that negotiating sector-by-sector trade deals with the EU could take 25 years. This could damage the UK economy. The CEBR seem to be talking about a ‘hard Brexit’ style situation. Many argue that there is no mandate for one Brexit option.

Office for National Statistics

The Office for National Statistics found that the UK economy had expanded in the first three months following the Brexit vote.

EY Item Club

The EY Item Club think tank has predicted that the economy will grow 1.9% in 2016. However they expect inflation to rise and the performance to “fizzle out”. According to the BBC, the chief economic advisor to the EY Item Club, Peter Spencer, said that the economy’s stability since the Brexit vote is “deceptive”.

Peter Spencer also talked of household incomes and spending being squeezed.

Bank of England governor Mark Carney

Mark Carney has said that inflation will rise because of the falling pound. He mentioned food as being one of the first products to experience price rises.

What did the Autumn Statement tell us?

Phillip Hammond released his autumn statement last week. But what does this mean for the UK economy?

After their analysis of the autumn statement, The Institute of Fiscal Studies (IFS) warned that workers in Britain faced the biggest squeeze on their pay for 70 years. This is due to Brexit knocking wage growth and stoking inflation. They said that Britons will earn no more in 2021 than they did in 2008, once pay is adjusted for inflation.

Phillip Hammond reportedly told MPs that the UK’s deficit would not be cleared by 2020, as previously planned. He went on to say that the new target was “as early as possible” afterwards. In fact, government finances are predicted to be £122 billion worse off than what was previously expected.

The Resolution Foundation think tank also carried out analysis of the autumn statement. They concluded that over the next five years families will face a worse squeeze on their living standards than they suffered after the global crash.

Fitch Ratings has said that the autumn statement shows Britain’s economy will suffer from the Brexit result.

Fitch said that:

“Official forecasts by the Office for Budget Responsibility (OBR) point to a substantially lower path for economic growth compared to the pre-referendum projections underpinning the March budget.

The OBR expects GDP growth to be cumulatively 1.4pp lower over its forecast period to 2021. Consumer price inflation will be higher due to a weaker exchange rate.

The OBR also believes potential growth in the UK economy will be lower due to a combination of lower assumed productivity and falling net migration.”

How strong is the pound?

Markets do not like uncertainty. After the Brexit vote, the pound slumped to a 31-year low.

Donald Trump’s election has caused uncertainty in America. The Italian constitutional referendum is causing uncertainty in the Eurozone. The pound has recovered a little against both the Euro and the Dollar because of these and other factors.

The pound also rose against the euro after the High Court ruled  Article 50 could not be triggered without parliamentary approval.

However, the pound is nowhere near as strong as it was before the Brexit vote.

The weak pound has an impact on the UK economy. It affects UK industries and consumers alike.

What impact does the pound have on UK industries?

When there is a weak pound, there are some businesses who will benefit and some who will not.

UK export businesses, foreign investors and any UK businesses who earn their profits abroad, will all benefit from a weak pound.

Businesses who export from the UK to the rest of the world should see profits increase. With a weaker pound, they are able to make more money from selling their goods than they would have done with a stronger pound.

the UK economy post brexit

Firms who export to the UK and foreign workers who work in the UK are among those who will not benefit from the weak pound.

However, the Office for National Statistics has found that the Brexit vote has actually failed to boost exports. This has caused Britain’s trade deficit with the rest of the world to widen.

Expert opinions warn that various UK industries could suffer after the Brexit vote.

The chief executive of the Society of Motor Manufacturers and Traders, Mike Hawes, has reportedly said that the UK is in a ‘constant battle to attract and retain investment’. This is because companies could choose to invest in other countries rather than the UK after the Brexit vote.

Some experts also believe that sector-by-sector deals, such as those reportedly struck with Nissan, could result in big bills for taxpayers.

This could have an adverse effect on the UK economy.

Analysis by the Office for National Statistics found that industrial production had fallen in the three months after the EU referendum.

PwC’s economy report suggested that the construction industry could suffer from lower investment levels in 2017.

The Office for National Statistics also revealed that Britain’s construction industry had its weakest performance in four years in the three months following the Brexit vote.

However, the ONS said that there was a rise in construction output in September of 0.3%. Commenting in the Independent, IHS Global Insight’s chief UK and European economist, Howard Archer, said:

“September’s rise of 0.3 per cent was insufficient to prevent construction output clearly contracting in the third quarter, by 1.1 per cent quarter-on-quarter.

“This was the weakest performance since the third quarter of 2012. In fact, by contracting 1.1 per cent quarter-on-quarter in the third quarter after a dip of 0.1 per cent in the second quarter, the sector is effectively in recession.”

The weak pound also means that it will be more expensive for the British to go on holiday abroad. Conversely, this could positively impact the British tourism industry, with more people possibly choosing to spend their holidays in the UK instead of abroad.

What impact does the weak pound have on UK consumers?

When the pound is weak, imports become more expensive. This means that the food we import is likely to become more expensive.

Expert options have predicted that food will be the first product that we as consumers see price rises on.

We have already seen this in the Tesco and Unilever dispute over Unilever’s proposed price hikes in household products such as Marmite, Dove and Pot Noodles.

Ex-Sainsbury’s chief Justin King has reportedly predicted that food prices are going to rise by 5% because of the falling pound after the Brexit vote.

Aldi and Lidl have already increased the price of basic groceries such as milk and bananas.

Finsbury Food Group has warned that cake prices may rise because of the Brexit vote.

What is inflation?

Inflation is the increase rate of prices of goods and services.

Before Brexit, the Bank of England had an official inflation target of 2%

What are expert opinions saying about inflation post-Brexit?

Earlier this month, the Bank of England warned households that they could see a sharp rise in inflation in 2017. This is because of the weak pound increasing costs of imports and squeezing family finances.

The bank predicted that petrol prices and any other goods that the UK buys from abroad would rise. The UK economy heavily relies on imports

The impact of inflation on the economy can be both good and bad.

Inflation means that the amount of goods people can buy will decrease because their money is worth less. Inflation could cause consumer spending to weaken.

Some experts are saying that an even greater increase in prices could make the Bank of England raise interest rates next year. This may not be good news for those looking to take out a mortgage.

Some expert opinions even suggest that inflation could grow to 4% next year.

The Bank of England does not expert inflation to go back to its 2% target until 2020.

However, there was good news for the UK economy as retail sales reportedly grew at the fastest annual pace for 14 years in October.

What are the expert opinions saying about interest rates post-Brexit?

Up until Brexit, many expert opinions had been pointing towards an increase in interest rates.

Lower interest rates are good for savers but are bad news for borrowers.

After Brexit, the Bank of England cut interest rates from 0.5% to 0.25%. This is a record low and is the first cut we have seen since 2009.

Many had been expecting another cut, but Bank of England Governor Mark Carney has indicated that this may be unlikely:

“’We’re willing to tolerate a bit of an overshoot in inflation over the course of the next few years in order to avoid (rising unemployment), to cushion the blow and make sure the economy can adjust as well as possible.’”

Others think that the Bank of England should raise interest rates to help stop the UK from going into a recession.

Will the UK go into recession?

A recession is said to have happened when the overall growth is negative for two consecutive quarterly periods (half a year).

There are many different expert opinions about whether the UK will go into a recession.

Crispin Odey, a hedge fund manager who supported the decision to leave the EU, has reportedly predicted that Britain is destined for a recession.

Mohamed El-Erian, Chief Economic Adviser at Allianz, told the BBC that if the UK government chooses the ‘hard Brexit’ route then the UK economy will go into recession.

However, there are some who say the UK economy is fairing much better than many had predicted before Brexit, so a recession is less likely.

It seems likely we will see some turbulence in the economy over the next few years and until we know what Brexit looks like. And this trend could continue.

What impact does the UK economy have on me?

With the weaker pound upping the price of imported goods and predicted rising inflation, household income may be squeezed.

For example, Mothercare has warned that their prices could rise by up to 5% in May.

This means that you could feel like you have less disposable income than before.

Now, more than ever, it is important to budget properly.

The Organisation for Economic Cooperation and Development (OECD) has reportedly warned that the UK should re-think its plans to increase the National Living Wage because of the expected slowing of growth after the Brexit vote.

What does the future hold for the UK economy?

This really is the million dollar question.

Whether the UK will go into a recession is still up for debate.

Many experts believe that there will be a rise in inflation and that the pound will fall further when Theresa May invokes Article 50.

Conclusion

There is no doubt that we are in unchartered waters in post-Brexit Britain.

The majority of experts seem to be predicting that we will see some negative effects of the Brexit vote on the economy, at least for the next few years.

Other experts argue factors, such as the growth in retail sales, shows that the UK economy is not as unstable after Brexit as some made out that it would be.

The falling value of the pound has led the Bank of England to warn that inflation will rise in 2017.

The pound further weakened when Theresa May talked of a ‘hard Brexit’. What this actually means still remains to be seen, as Theresa May has yet to detail what she expects a ‘hard Brexit’ to look like.

What happens in Europe and the rest of the world will have an impact on the UK economy. Factors such as the US election results and the Italian constitutional referendum strengthened the pound slightly.

However, it still remains the case that markets do not like uncertainty.

With Donald Trump taking a surprise victory in the US elections earlier this month, it does now seem that anything may be possible.

Whether the UK will go into another recession still remains to be seen.

Over the next few months and even years, we are likely to see more and more uncertainty.

This could mean a rocky road ahead for the UK economy. Whether it is stable or not and what it will look like after Brexit are both hotly debated topics among the experts.

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