There is just one year to go until the UK is due to split from the European Union and at first glance the economy doesn’t seem to have imploded as some predicted.
Much has been made of the rise in production output every quarter since the Brexit referendum (with an expansion of 1.8 per cent in 2017). Meanwhile unemployment is near its lowest since the 1970s and inflation is dropping thanks to the impact of the fall in the pound.
But this is only half the story – short term, things may look far less disastrous than many feared following the Brexit vote; long term, the outlook may not be quite so positive.
And to put this much-discussed growth in context, let’s look at our nearest neighbours. According to Bloomberg: “The nation’s stronger-than-expected expansion still was close to the bottom of the G-7 charts last year. In the neighbouring euro region, growth was the best in a decade and it surpassed forecasts far more than the UK did.”
It could be, then, that this growth is really just a knock-on effect of the boom on the rest of the continent, and indeed the rest of the world: the US has seen strong performance and it’s expected that President Donald Trump’s tax cuts will aid expansion there. The National Institute of Economic and Social Research (NIESR) has stated that the strength of the global economy and the benefit for British exporters from the weak pound would help increase GDP growth by almost 2 per cent this year and next. But for how long?
Increased risk
Another factor that may have contributed to the solid UK growth figures is the rise in domestic demand. With the employment market looking stronger, as mentioned above, consumer spending and borrowing have increased. Confidence appears to be on the up.
But of course, as we have learned from the 2008 crash, increased exuberance, borrowing and lending comes with its own risks and leaves consumers vulnerable to interest hikes or a slowdown in employment rates. The UK Financial Conduct Authority underlined this point when it said that even a gradual increase in interest rates “could have a detrimental effect on consumers who carry very high levels of debt.” Meanwhile economists say the Bank of England is likely to press ahead with raising interest rates as early as next month.
Then there is the question of investment, which has been stunted by uncertainty over Brexit. Estimates from the Bank of England have suggested that business investment is four per cent lower than it would have been if Britain had not voted to leave the EU.
What next?
With such a complex issue and so many competing factors it is almost impossible to ascertain whether the UK’s current economic growth is indeed sustainable, or a temporary blind boosted by a robust overall economy throughout Europe and the rest of the world. What is clear is that, while business leaders are still in the dark about what exactly Brexit means for the UK, it is difficult to make any long-term strategic plans or economic forecasts.
So what does this mean for the manufacturing sector when it comes to forward planning? According to Francesco Arcangeli, Economist at the manufacturing association EEF, “In order to maintain growth, businesses need to focus more energy on improving productivity, which hasn’t seen much growth since the ‘Great Recession’. The job market is currently close to full employment and the Brexit process has already reduced the inflows of skilled an unskilled workers from continental Europe, thus the only sustainable way to keep growing is increasing efficiency through the use of better equipment and working techniques.”
Victoria Hattersley for Industry Europe