UK economic outlook: Where are we going from here?
There is great deal of angst in the UK economy at present, interest rates are constantly rising with more yet to come, homeowners are facing a decline in the values of their homes for the first time in 12 years (as reported by Halifax), mortgage products are being withdrawn and fixed rates are rising. Food inflation at 18% remains at record high, overall wages are not keeping up with inflation resulting in consumers feeling pinched.
Business expectations regarding real growth in output remain cautious. This is caused by supply chain challenges and rising costs of inputs. Real growth prospects remain constricted by a lack of investment in technology, plant and equipment, availability of business premises, fuelled in part by higher financing costs and lack of confidence in the future. Productivity remains poor caused by lack of investment and the UK plc is becoming less competitive against EU and global companies.
One of the key constraints on growth, particularly in the production and construction sectors, is a lack of skilled labour. Many older members of skilled labour have not returned to work following Covid and there is a reticence and lack of interest of the younger generation to enter these sectors, particularly in the production and engineering sectors.
Interestingly, on the plus side, vacancies are falling with April and March 2023 recording 79k and 52k decreases. There appears to be a rising trend in people looking for work, relative to the number of vacancies. Growth in the number of payrolled in work appears to have slowed following strong increases earlier in the year. Is this indicating a loosening of demand for people in businesses? This may be the case in certain sectors but in the finance sector, demand for people is outstripping supply resulting in distressed pay demands. The unemployment rate actually fell in April to 3.8%. Pay settlements remain on the upward trend with data to the end of March showing that regular pay excluding bonuses has risen by 6.8% which is still well below actual inflation at just over 8%. This upward trend would not have helped the Bank of England to decide on future of interest rates and where the peak will be.
- The services sector recorded a modest improvement in April of 0.3% but that did not reverse the March reduction of 0.5%. Industrial action has heavily affected both these numbers with strikes happening in March but not in April. More than 9% of businesses have been affected by the current industrial action.
- The food and beverage sector remains one of the most buoyant sectors and is one of the few to record nearly 9% increases in output which exceeds pre-pandemic levels. It appears that despite the cost of living crisis people still like to eat and drink out.
- The production sector contracted in April by 0.3% which contradicted previous sentiment that this sector was in a robust state but confirms data that PMI in this sector has declined since last summer.
- Construction sector output also declined by 0.6% in April caused by a 1% fall in orders.
There is rhetoric emanating from the Monetary Policy Committee that rates will continue to rise with inflation remaining stubbornly high. Their decision in their meeting on 22 June 2023 will be heavily influenced by CPI data that comes out the day before, but trajectory of rates continues to be higher with rates potentially peaking at 6%. Indeed, the market is already factoring this expectation into future pricing. However, using interest rates is an extremely blunt tool to curb inflation and should be balanced against a stagnating economy with declining investment spend and currently flat growth rates. However, it’s predicted to enter negative territory by end of 2023.
Bank of England presentation
Next week will be a pivotal week with CPI data coming and MPC issuing its interest rate decisions which will profoundly affect businesses and individuals.
Therefore, on 28 June Patrick Campbell from the Bank of England will join our South East Manufacturing Forum to cover the state of the UK and wider global economies, growth expectations and most importantly comment on the trajectory of interest rates. The South East Manufacturing Forum is co-hosted by Kreston Reeves, Barclays and Whitehead Monckton and will take place at Whitehead Monckton’s offices in Maidstone commencing at 6:00pm. To register for this event please reserve your spot on our Eventbrite booking page. I look forward to welcoming you at this annual event.
The economic landscape remains uncertain and challenging for all businesses – planning, agility and resilience are key.
We are hosting a selection of Finance focus online events in early July, the first of which will include an economic update. These events aim to provide guidance to help businesses navigate the changes. Find out more about these events and book your place.
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