Return to growth: new UK GDP figures allay recession fears – for now

BY Fraser Tennant

The UK economy grew by 0.5 percent in May 2022 after a decline of 0.2 percent in April, according to new figures from the Office for National Statistics (ONS).

Economists had expected zero growth in May alone, and in the three months to May, amid the UK’s cost of living crisis.

The ONS reports that the services sector was responsible for the majority of the increase in growth, with a particular emphasis on human health and social work activities. A surge in GP appointments has also aided the UK economy, helping to prop up health service activity, despite a huge drop in test and trace vaccinations.

Less positively, the ONS figures provide proof that the UK consumer base is on shaky ground, with consumer-facing services such as retail trade, food and beverage, travel and transport, and entertainment and recreation, seeing output fall 0.1 percent. In addition, consumer-facing services were 4.7 percent below pre-coronavirus (COVID-19) levels.

“While it is positive to see a small nudge upwards in overall GDP, these figures are hardly shooting the lights out,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown. “It will take something strong to fully reverse fears the UK’s heading towards a recession in the coming year. Until there is a clear path out from political turmoil, the energy crisis, cost-of-living squeeze and the UK’s far-reaching productivity problems, it is hard to see where the economy will find its take-off point.”

Sharing the fear that the risk of recession has only been temporarily allayed is James Brown, a managing partner at Simon Kucher & Partners, who suggests that UK businesses may respond to a looming recession by raising prices.  

“It is looking increasingly likely that a meaningful price adjustment will be one of the few tools remaining at the disposal of UK businesses,” he concludes. “While the surprise increase in growth comes as welcome news, the possibility of the UK entering a recession during the second half of 2022 and beyond still looms large.”

News: UK economy returns to growth aided by travel rebound and haulage

UK consumer confidence climbs but caution remains, says new report

BY Fraser Tennant

A more positive economic landscape is helping to boost consumer confidence in the UK, according to a new report by Deloitte.

In its ‘Consumer Tracker Q1 2019’ report – based on the response of over 3000 consumers in the UK – Deloitte reveals that its UK consumer confidence index in Q1 rose 1 percentage point, to -8 percent, driven by greater optimism about personal finances.

Indeed, Deloitte notes that confidence in levels of disposable income and sentiment about levels of debt grew by 5 and 4 percentage points respectively in Q1 2019.

That said, Deloitte’s overall consumer confidence index remains close to a one-and-a-half year low, which suggests that it will not only take longer for positive economic news to restore consumer confidence to previous levels, but could also require greater certainty around how and when the UK leaves the EU.

“The bounce in consumer sentiment comes against a backdrop of heightened uncertainty around Brexit during the survey period in late March,” said Ian Stewart, chief economist at Deloitte. “Consumers also faced headwinds from a slowing global economy while at home housing activity has softened and consumer credit is less easy to come by. Despite the deluge of bad news consumer confidence has held up, fuelled by rising real incomes, a buoyant jobs market and ultra-low mortgage costs.

“Earnings growth has now outstripped inflation for 13 consecutive months, while unemployment is at its lowest level since 1975. Mortgage rates remain close to all-time lows,” he continues. “The key question for the UK consumer is whether growing corporate nervousness will trigger a squeeze on pay and jobs in the second half of the year.”

Overall UK consumer confidence is calculated by Deloitte as an aggregate of six individual measures: job security, job opportunities, household disposable income, level of debt, children’s education and welfare, and general health and wellbeing.

Ben Perkins, head of consumer research at Deloitte, concluded: “Brexit remains on the horizon and only when this uncertainty lifts will we be able to judge the underlying strength of the consumer market. Meanwhile, consumers continue to rebuild their finances, reflected in a slowdown in borrowing and an increase in savings.”

Report: Deloitte Consumer Tracker Q1 2019

UK attractiveness falls as Brexit fears begin to bite

BY Richard Summerfield

The UK remains the number one destination for foreign direct investment (FDI) in Europe, according to EY’s latest UK Attractiveness Survey. However, there was a notable decline in sentiment from foreign investors toward the UK as a place to invest in the future, which has allowed Germany and France in particular to gain ground.

The UK’s economy is in a state of transition, according to EY, with Brexit and ongoing technological changes impacting investments across sectors, as well as project types and sizes. In 2017, the UK attracted 6 percent more FDI projects compared with 2016, with the number of projects rising to 1205 from 1138. There was also a 6 percent boost in the number of FDI-related jobs created, to 50,196.

However, the UK’s traditional FDI targeted sectors, financial services and business services, recorded significant declines last years. Projects in the financial services space fell by 26 percent, despite the sector recording growth across Europe – the total number across the EU rose by 13 percent. The business services sector saw a decline of 10 percent as the European market recorded growth.  Last year also saw the UK fall to second place behind Germany in attracting business services projects, as UK projects from this sector fell and Germany’s increased.

EY also noted a “marked increase” in UK outbound investment in 2017, with the trend particularly evident in the financial and business services sectors. The total number of outbound investments was 464, up 35 percent on the previous year’s total of 343; 110 of those investments went to Germany, and 79 to France. Business services outbound projects rose from 117 to 125, up 7 percent.

“It’s quite a pick up,” said Mark Gregory, EY’s chief economist, referring to the outbound investment project figures. “If it hadn’t been for the surge of digital, then the overall numbers would look pretty ugly. Lots of these digital projects are quite small. Our core is flat or shrinking.”

For the first time since EY began reporting on investment attractiveness, London is no longer the most attractive city for FDI in Europe. That honour goes to Paris, thanks to the burgeoning impact of Brexit and the so-called ‘Macron effect’.

Report: UK Attractiveness Survey

Stable but sluggish

BY Richard Summerfield               

The UK is expected to see GDP growth of 1.6 percent in 2018, according to the latest EY ITEM Club Spring Forecast.

Continuing 2017’s "uninspiring" growth levels, the country’s 2018 forecast has actually been slightly downgraded from 1.7 percent. Q1 GDP figures are expected to show growth of just 0.2 -0.3 percent, primarily due to the severe weather that hit the country at the end of February and beginning of March. The final quarter of 2017 saw 0.4 percent year-on-year growth.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “The UK economy is chugging along at a fairly steady but uninspiring rate. On the surface, the outlook appears stable. Inflation, which impacted consumer spending last year, continues to drop and we expect a tight jobs market to deliver some uptick in pay growth. Significantly, a transitional Brexit agreement between the UK and EU has been agreed which should also bring some certainty to businesses and support investment, although it still needs to be ratified. However, these factors may be offset by rising interest rates, a recovery in sterling’s value and still appreciable Brexit uncertainties bringing new headwinds over the year.”

EY expects the second quarter of 2018 to see quarter-on-quarter growth of 0.5 percent. Consumers are expected to experience a ‘double positive’ for real income growth moving forward, with inflation set to fall and stronger pay growth anticipated.

Household income growth is expected to reach 1.2 percent in 2018, rising to 1.4 percent in 2019, a marked improvement on 2017’s 0.2 percent increase. However, the income growth is not expected to translate into an improvement on 2017’s 1.7 percent rise in consumer spending.

The economic uncertainty caused by the ongoing Brexit negotiations should be alleviated shortly, and business investments should benefit as a result, according to the report. Yet due to the weak growth recorded in the second half of 2017, business investment in the UK is only expected to grow by 1.7 percent in 2018 before picking up to 2.7 percent in 2019.

However, Brexit is not the only cloud on the horizon. “Potentially adverse developments in trade policies and geopolitics could hit trade flows”, according to Mark Gregory, EY’s chief economist, UK. Though a resurgent global economy bolstered the UK’s economy, geopolitical headwinds could still curtail growth in the coming months.

Report: EY ITEM Club Spring Forecast 2018

Rise of the robots

BY Richard Summerfield

Automation is coming. Recent reports have suggested that millions of people around the world will be impacted by the wave of automation and other new technologies which are currently emerging.

A new report from PwC – 'Will robots really steal our jobs?' – suggests that while the financial services industry in particular could be vulnerable to automation in the short term, a variety of industries, including those in the transport space, are much more vulnerable in the longer term in the UK. Less well educated workers, too, will be increasingly susceptible to replacement. Female workers are also more likely to be replaced than their male counterparts.

PwC has identified three distinct waves of automation which will impact the global economy up to 2030: the algorithm wave, the augmentation wave and the autonomy wave.

The algorithm wave is already underway and will last until the early 2020s. It involves automating structured data analysis and simple digital tasks, such as credit scoring. This wave could see just 2-3 percent of UK employees affected – 4 percent of women and 1 percent of men.

The augmentation wave, which centres on the automation of repeatable tasks and exchanging information, as well as further development of aerial drones, robots in warehouses and semi-autonomous vehicles, could impact 20 percent of UK jobs – 23 percent of women and 17 percent of men. This wave will last until the late 2020s.

The third wave, the autonomy wave, suggests that AI will have developed to the point that it will be able to analyse data from multiple sources, make decisions and take physical actions with little or no human input. This wave will last until the mid 2030s and could affect 30 percent of the workforce – 26 percent of women and 34 percent of men.

Euan Cameron, UK Artificial Intelligence leader at PwC, said: “Our research shows that the impact from automation and AI will be felt in waves, with more routine and data tasks hit first. But just because businesses and people aren’t feeling the impacts right now, there is no excuse not to start planning for the future. AI technology is getting more sophisticated every day and businesses need to understand how, where and when their people are likely to be affected in the future. Those that understand the risks and opportunities can start upskilling their people and adapting their businesses, rather than simply reacting when it’s too late.”

Automation is expected to be a boon for the economy, however. PwC believes it could contribute as much as 10 percent to UK GDP and 14 percent to global GDP by 2030.

Report: Will robots really steal our jobs?