With his willingness to accept a no deal Brexit, new Prime Minister Boris Johnson has already been accused of bringing down the UK economy, and causing GDP to shrink.
This is probably unfair – he has only been in office for under a month, and GDP is based on 3 month figures. But what exactly is GDP – and what is its impact for your own financial plans?
What exactly is GDP?
GDP – Gross Domestic Product – is the main way of determining the health of the UK economy.
It is a measure of the total value of goods and services produced in the economy. It is usually given as a percentage change over a three month period, which allows it to provide a simple way to view how the economy is performing.
If the GDP is up on the previous three months, the economy is growing. Wealth and more jobs are being created.
If it is down, the economy is shrinking. Two consecutive three month negatives define a recession.
The last set of figures, for the second quarter of 2019, look negative, shrinking by 0.2%.
Why is this a problem?
An economy which is growing steadily is much more comfortable for individuals and businesses affected than one which is contracting.
Jobs are easier to find when companies have positive prospects. Investments in those companies can be more rewarding. When economies shrink, available wealth and standards of living fall.
Chancellor Sajid Javid, insisted the fundamentals of the British economy remained strong, but pointed to a challenging global environment.
Certainly, Brexit and fears about Boris Johnson’s willingness to countenance a no deal are only part of the problem. Global trade tensions have triggered falls around the world.
What happens now?
Economists base much of their thinking on GDP.
The Bank of England uses it as a key indicator in setting interest rates. If the economy is overheating, the bank could increase interest rates to control them. But it will hold off increases and possibly even consider cuts if GDP growth is slow.
The Treasury uses GDP when planning economic policy. When an economy is shrinking, the amount the government gets from taxes tends to fall and the government adjusts its tax and spending plans accordingly.
UK GDP is also used internationally by financial bodies such as the World Bank and the International Monetary Fund to compare growth between different countries.
What all this means is that those with their hands on the economic levers may be pulling them now to try to avoid more shrinkage over the next three months, which would mean that the UK would be in a recession.
But are things as bad as they appear?
As so often with economic measures, the true picture may be more complicated.
The UK’s early estimates of GDP are based on output – which is relatively easy to assess, but not the whole story. The initial estimates provide the government with an early snapshot of the real growth in economic activity, but it can be revised as more information comes in.
It looks as though GDP has fallen, but as Mr Javid points out, wages are growing, employment is at a record high and that the UK is still forecast to grow faster than Germany, Italy and Japan this year
However, it is probably true that the economy is suffering from a combination of slower global growth and Brexit uncertainty. What might have been slow but steady growth has been hit by an unwind of stockpiling and car manufacturers shifting their seasonal shutdowns, and a high street that shoppers are shunning in favour of the internet.
What should you do?
A slowdown may not become a recession, and with the outcome for Brexit still in doubt, it is impossible to say what the future of the UK economy really is. A post Brexit boom is not impossible.
But you can’t afford uncertainties when your own finances are at stake. At Continuum, our team have helped many people deal with the challenges of previous recessions and helped them make the most of fair economic weather. We know the strategies to take, to protect your portfolio by diversification for example – or to find investments which are most likely to remain relatively unaffected if the Brexit boom turns out to be a misfire.
We can help you make the most of your own personal economy, whatever deal Mr. Johnson brings home for Brexit. To find out how, simply call us.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.