Why we can’t afford to be complacent
Tony Ward is chief executive of Clayton Euro Risk
What’s not to like? The UK economy is doing well – much better than the horrendous predictions that certain economists made post-Brexit. Confidence has returned to British businesses as well as consumers with both reporting a jump in optimism about their prospects and the wider UK economy over the next 12 months. House prices are stable, productivity has climbed and the economy is enjoying its strongest rate of expansion since January. This is the verdict of the latest all-sector purchasing managers’ index, which tracks output across manufacturing, services and construction and is regarded as one of the best barometers of the economy. So where’s the problem? Even the Bank of England admitted that the UK’s economy is performing better than expected.
All well and good. However, I’m looking ahead and it’s what’s going to happen over the next six months that’s starting to bother me.
I was interested to read deputy governor to the Bank of England Ben Broadbent’s comments in the press last week. He seems to be thinking along the same lines as me, suggesting that while Britain’s economy has held up well since the vote to leave the EU, uncertainty around the future of international trading relationships could hit investment. He said that even if growth stays strong, that uncertainty alone is dangerous, making it hard for businesses to know if they should make big spending decisions. This means that the UK may not see any immediate change in its economic prospects, but instead will be harmed over time by an absence of new investment projects. “Uncertainty per se raises the bar for all such decisions, disinvestment and new investment alike,” he said. ‘So a lack of clarity about the UK’s future trading relationships needn’t result in visible, headline-grabbing closures of productive capacity. The effect is likely to be more insidious: decisions to expand, that might otherwise have been taken, are delayed.”
Indeed. He goes on to say that by contrast consumer spending is less affected by uncertainty, which has been evidenced in upbeat surveys from the likes of GfK and YouGov. He said that the economy appears to be performing well, but the full impact of the uncertainty surrounding Brexit will only become clear in time once more information is known.
Signs of economic stress in the commercial property and overseas investment markets which indicate discontent in financial markets are evident. Foreign investors have reined in the rate at which they invest in the UK. While investors have not withdrawn large sums from the UK, despite early fears that capital would flee the country, the pace of new investment has certainly slowed. And that’s a big worry. “Net purchases of FTSE 100 shares by non-residents in July and August were, on average, around half of the average monthly inflows observed in 2015,” the Bank of England’s Financial Policy Committee observed, citing evidence from S&P Market Intelligence. Gross foreign investment in UK commercial real estate (CRE) assets on average in July and August was less than a third of average monthly foreign investment in 2015.
Although the market has calmed since July’s panic, transaction volumes in CRE over July–August were down 60% on the summer of 2015. Prices on average fell 2.8% in July and 0.7% in August. Analysts expect prices to have fallen by 10% by the end of next year. The Bank said that banks are ‘resilient to stresses in the CRE market’ but that a fall in the sector could ‘result in a tightening of credit conditions, and affect economic activity, by reducing the ability of companies that use CRE as collateral to access finance’. As 75% of small and medium-sized businesses borrow against property, this could affect firms’ ability to grow.
So all areas to watch. And what with a ‘hard Brexit’ looming, as indicated by Theresa May, the markets are not going to settle any time soon. The chancellor Philip Hammond has warned of a ‘bumpy ride ahead’. Let’s hope for some strong governance and confident assurances in the tricky time in the months to come.