The economic slowdown, and why it may already be over

economic slowdownIt’s getting hard to understand just which way the economy is heading. Some observers suggest that the UK is heading for a Brexit boom, while others seem to believe that the economy is already in the process of falling off a cliff.

Both can’t be right, and some may have a political axe to grind. We take a look at what is really going on.

Mixed messages

Looking at recent trade figures certainly suggests that there has been a real slowdown in growth cross the UK. The Office for National Statistics has confirmed the UK economy slowed in the first quarter of the year as consumers are put off spending by rising prices.

Their official figures show that the UK’s gross domestic product rose just 0.3% in the January to March period, compared to 0.7%in the last quarter of 2016. The Bank of England obviously believes that this is more than just a blip, and has downgraded its growth forecasts for 2017 and 2018.

However, although the economy as a whole is not growing as fast as had been hoped, it is still on the way up, even if the route its taking is a little less dramatic than had been predicted. Some sectors have been thriving.

Retailers, like fashion chain Next may have been struggling, but small and medium sized manufacturers, have been showing rapid growth. Output among small and medium sized manufacturers has grown at its fastest for seven years, according to the latest quarterly SME trends survey. This is being echoed by a string of positive results from top UK firms including oil giant BP and engineers BAE Systems. Rolls-Royce reported a 12 % surge in revenues to £7.6billion in the first half of the year.

What is going on?

There are a number of factors in play which are pulling the economy in different directions. On the one hand, Brexit fears and uncertainties, which are being made all the worse by the current rocky Brexit negotiations are denting consumer confidence. People in general are less likely to commit to buying a new car, for example, if they believe they might not have a job in a year or two’s time.

On the other hand, those same pressures are dragging down the pound on international markets. A pound which is hard pressed to buy a euro in a bureau de change may make us gloomy when we go on holiday, but it makes British exports, from Scotch whiskey to cars hard to resist.  A report by the Confederation of British Industry shows output from the UK’s small and medium-sized manufacturers is rising at the fastest pace for seven years.

Firms are clearly enjoying an exporting boom, based on the low exchange rate and a growing global market.

What next?

A pessimist might say that the boom is simply the result of low export prices, and will be sharply curtailed when the realities of Brexit come clear.

However, the Bank of England seems to be taking a more optimistic stance. Governor Mark Carney seems to be assuming a relatively smooth transition to a new trading relationship with the EU.

In the shorter term, it seems that the slowdown is already easing.  There are upbeat figures in the key services sector, and consumers may have something to celebrate with the trend to higher food prices having reversed: According to Helen Dickinson, CEO of the British ­Retail Consortium, July saw lower food price inflation than in June. If inflationary pressures are easing, it should support income growth in real terms, boosting consumer confidence.

What should you do about your finances?

The Bank of England may have revised estimates downwards, and put off any rise in interest rates for little longer, partly because of a reduction in the burst of inflation that followed the fall in sterling.

However, it cannot be denied that the UK economy has clocked up steady growth, which could be set to continue. It seems as though a mood of cautious optimism may be appropriate.

If you would like to discuss how this should affect your own financial planning, it pays to get some professional advice. Simply contact the professional team at Continuum.

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