More Wrong Kind of Growth


The UK economy experienced another year of modest economic performance in 2017. Despite the technological drive for change across a range of industries, political, public sector, business investment and consumer factors held back the pace of economic development.

The consensus is that there will be ‘more of the same’ in 2018, with the ‘wrong kind of growth’ persisting unless productivity accelerates. Inflation is expected to stay above target but ease back from its exchange rate highs. The risk of recession is higher than the risk of a boom but an improving world economic outlook suggests some upside to offset BREXIT uncertainties.

Even if the forecasters are correct, there should be considerable interest in major structural changes that will be negotiated or get underway this year, especially those related to future trade patterns and industrial strategy.

Against this background, local businesses are confident, operating at high capacity and continuing to face constraints from infrastructure and skills. The need for investment in competitive productivity has never been stronger.

The UK Economy


UK Annual Quarterly Monthly
Real GDP (%ch, yoy) +1.8 (’17) +1.5 (Q4) n.a.
CPI inflation (%ch, yoy) 2.7 (’17) 3.0 (Q4) 3.0 (Dec)
LFS unemployment (%) 4.9 (’16) 4.3 (Q3) 4.3 (Aug-Oct)
Trade deficit* (£bn) -40.7 (’16) -5.8 (Q3) -2.8 (Nov)
Base rate (%) 0.29 (’17) 0.41 (Q4 17) 0.5 (Jan 18)

Source: ONS   *goods and services

The UK economy (table above) ended 2017 with modest growth, high inflation and low unemployment. The trade deficit was probably shrinking a bit and interest rates were starting to edge higher, along the yield curve. There were signs of good activity in some manufacturing and export sectors but the overall mood in many industries was more sombre, with uncertainty about the future weighing on business decision making. At the same time, consumers were restrained by falling real incomes whilst net government and net trade’s contributions were unhelpful, at best.

For 2018, the questions are whether unemployment has troughed, inflation has peaked and growth can be maintained. Most forecasters suggest a slight move away from the ‘wrong kind of growth’ towards more productivity-led activity but the extent of the improvement is expected to be modest. In particular, the consensus of current forecasts is for 1.4% growth and 2.4% inflation, both slower than in 2017.


There were three key messages from the OBR in November:

  • The cyclical economy is weaker than previously thought: growth projections fell (not forecast to reach 2%p.a. over next 5 years).
  • The structural economy is weaker than previously thought: growth potential dropped to c1.4% per annum (because productivity worse).
  • The fiscal economy is weaker than previously thought: public finances in deficit until 2019/20. (Debt burden stays close to 80% of GDP.)

Essentially, the OBR is predicting more of the same over the forecast period. This can be summed up as “the wrong kind of growth” – growth not fuelled by enough investment, productivity and real earnings.   The economy is operating near to potential and there is little spare capacity. In the near term, BREXIT uncertainty dampens domestic and foreign direct investment, whilst reducing net immigration, compared with what otherwise might have occurred.

There are two broad risks to this OBR central outlook:

  • Fears about BREXIT disruption may be over-stated. New technological innovation, skills and investment may add value more quickly than anticipated. Also, a buoyant world economy could provide more of a local boost, as long as the pound remains competitive and UK trading patterns can be adjusted smoothly. Output and productivity growth may get back to 2% p.a. or more sooner than we think.
  • The forecasts are now so low, however, that the chance of a shock to confidence causing a further slowdown, even recession, cannot be ruled out. Investment and consumption may stagnate because of constrained living standards/high debt burdens, new trade barriers/corporate realignment of capacity and operations, and higher interest rates.

The future is always uncertain but the current UK outlook is particularly so.


Interest rates remain very low and are only expected to increase slowly over the next few years. Base rates probably need to get back to about 3.5% at some point (roughly equivalent to underlying nominal GDP growth), if pre – Great Recession ‘normality’ is to be restored.

As long as this is done in small, slow steps, such an adjustment need not hurt overall economic growth. There may be some pain for over-extended households and corporate debtors who have not planned properly for higher rates, but a gradual process of change to more ‘normal’ interest levels will improve resource allocation in time – a necessary condition for getting the economy working well and sustainably.

The fiscal side of stabilisation policy remains constrained by historical and projected levels and ratios of debt. Political imperatives may allow some easing of the immediate fiscal stance, but the room for manoeuvre is limited in a low productivity, low growth economy that is losing clarity about access to important international markets.

Structural reform of the public finances is warranted but may be difficult in the current febrile environment of BREXIT and minority government.

The Dorset Economy


The evidence is that the local economy lost a little momentum in the second half of 2017, reflecting the uncertainty about how BREXIT will evolve. It is unclear as to whether this is a real effect or a convenient scapegoat and some local firms are still quite sanguine. Whatever the truth, the impact is the same – more modest growth in 2018.

For example, the collapse of Carillion (15/1/18) suggests construction and public services may lose output in the near term whilst worrying statements from Airbus (FT 16/1/18) about the prospects for aerospace cast something of a cloud over local supply chains. Similarly, there have been a number of reports, notably from the CBI (FT 26/1/18), that contingency plans for “no deal” are being implemented by externally orientated businesses and this will involve a loss of UK jobs.

The latest Federation of Small Businesses Survey (FT 5/1/18) found a high number (1 in 7) of respondents planning to downsize, close or sell the business in 2018. The overall confidence index was negative for only the second time in five years – the other time was just after the BREXIT referendum day 2016. Falling profits were highlighted, as costs increased and demand, especially consumer demand, weakened.

Similarly, the most recent Chamber of Commerce Survey casts a subdued shadow over the business atmosphere. It shows waning confidence in manufacturing and services at a national level. In Dorset, the mood was steadier about current activity and prospects. Locally, in the latest quarter, sales and orders remained positive and employment and exports grew. In the year ahead, more Dorset respondents expect turnover and profitability to rise than to decline. The prospects were steady compared with the previous quarter – an outlook a bit more confident than seen in the country as a whole.

The various Purchasing Managers’ surveys continue to send mixed signals but there was a softening of activity through 2017 in the SW region, including Dorset. The December report showed business confidence about the near future resilient yet the output and employment measures, whilst still positive, were lower. Compared with a year ago, last month’s output reading was down 11% (from 58.7 to 52.2).

Meanwhile, in the year to September 2017, Dorset enjoyed virtually full employment, with most local places’ ratios below national and many below SW regional averages (see next table – SW averages 78% and 3.5% respectively).

Local Labour Indicators (Oct 2016 – Sep 2017)

Emp % Unemp % Emp % Unemp %
Bournemouth 76.4 3.8 Dorset 78.5 2.7
Poole 75.3 3.2 Somerset 74.8 4.0
Christchurch 80.7 2.3 Devon 78.3 3.0
East Dorset 80.6 2.4 Wiltshire 81.0 3.1
North Dorset 83.7 2.5 Southampton 73.3 4.9
Purbeck 85.2 2.3 Portsmouth 74.0 4.3
West Dorset 79.4 2.7 Hampshire 81.1 3.0
Weymouth & Portland 62.8 4.0 Isle of Wight 71.8 4.3

Source: ONS: employment 16-64 age groups, APS. unemployment 16+ economically active

The local labour market is tight and living costs high, making it hard to find and attract new and replacement skills as long as companies are unwilling or unable to pay higher wages. Skills acquisition and retention is a key area in need of improvement if Dorset is to move towards more sustainable, productivity-led growth.

There is also an issue about a shrinking of the ‘middle’ market, with new entrants (16-25 years old) finding it hard to enter and progress along a desired career path (see Prince’s Trust Survey released 24/1/18 – said to reveal “a staggering deterioration of young people’s confidence in themselves and in their future”).


In December, the ONS released latest numbers on the GVA breakdown for 2016 for Dorset.  Total GVA was £16.1bn in 2016 (current prices), placing the county 32nd out of the 38 LEP areas – roughly as expected given its relative size. In terms of GVA per head, taking population into account, Dorset achieved £20,900. This broad measure of productive performance showed Dorset to be below regional and national averages, ranking 24th out of the 38 LEPs.

Dorset’s index of GVA per head was 79.3 (UK average = 100) – down on the previous year. For the first time, Dorset was more than 20 percentage points (pps) below the national average, continuing a long-term downward trend.

This slippage in comparable standing is disappointing. Although it reflects a widening gap across the country (Greater London versus the rest), it also indicates a poor relative local productivity record: Dorset GVA per head dropped from just 8.7pps below the UK average in 2000 to 20.7pps below average in 2016.

This fall in the relative GVA per head index is similar to the experience of other south coast areas. Amongst the 12 “southern” LEPs listed in the next table, Dorset ranked 10th on GVA per head. Only four of twelve have seen a positive change over the last two decades.

GVA per head by LEP area, UK = 100 2016 & pps change since 1998

index change   index change
Cornwall & IoS 64.8 -0.5 Solent 91.7 -8.9
Heart of the SW 75.2 -4.7 Oxfordshire 126.6 +6.9
Dorset 79.3 -9.4 Coast to Capital 95.6 -10.5
Gloucestershire 99.1 +3.0 Bucks Thames Valley 114.3 -12.7
Swindon & Wilts 96.9 -12.2 Enterprise M3 122.3 +2.1
West of England 111.5 +4.5 Thames Valley Berks 158.4 -6.1

Source ONS.

Recent growth in Dorset GVA has been in services, with most growth in business and financial services and least in manufacturing and resources. Production has gone from 23.5% of the economy in 1998 to 18.5% in 2016. This 5% loss has shifted largely to private services (not including real estate).  Within Dorset, about two-thirds of the GVA was generated in the east Dorset conurbation – Bournemouth, Poole, Christchurch and East Dorset (next table shows details).

GVA & GVA per head within Dorset: All industries

£mn £/head GVA % share
Bournemouth 4,145 20,971 25.7
Poole 3,964 26,167 24.6
Christchurch 1,019 20,596 6.3
East Dorset 1,693 18,999 10.5
North Dorset 1,233 17,354 7.6
Purbeck 879 18,962 5.5
West Dorset 2,322 22,905 14.4
Weymouth & Portland 875 13,386 5.4

Source: ONS

The Government’s recently announced Industrial Strategy (below) aims to correct some of the imbalances and inadequacies displayed by the latest GVA statistics.

The annual GVA regional performance publication will always be one of the areas where future analysts will observe whether the Industrial Strategy is having the desired effect.

The Development Outlook


More open trade deals between customs unions/countries are intended to increase economic welfare for all partners to the agreement by reducing barriers to exchange in the markets and sectors covered by the agreement, i.e. by increasing economic efficiency, productivity and wealth.

Economic analysis shows decisively, in theory and in practice, that movement towards open (freer and fairer) trade is a net ‘good’ for all concerned. It is one of the things on which virtually all economists agree: more open trade increases competition, raises productivity and boosts living standards for trading partners as resources are re-allocated to reflect absolute and comparative advantage. Although there may be internal distribution issues, all macro parties are better off.

Historically, most trade deal activity has been based on trade in products rather than services but, increasingly, more agreements are likely to be made about the latter. It is important, however, to remember that trade deals are political as well as economic animals. Sadly, the spirit of mercantilism – the view that trade is a zero-sum game with winners (surplus generators) and losers (deficit generators) – is far from dead. In a world of “America First” and “Deutsche vorherrshaft”), Ricardian views of trade – that efficient and mutual specialisation means it is not a zero-sum game) – need to be defended.

This is what is worrying about BREXIT. For example, one of the UK’s comparative advantages is in financial services. Shifting capacity from London to Paris, because of reduced EU access freedoms/passports for the former, merely diminishes both countries’ ability to create total wealth most effectively: a potentially negative reallocation of resources.

The problem is that BREXIT does the opposite to ‘normal’ trade negotiations. For any likely eventual UK-EU terms, it leads to a constraint on trade rather than a liberalisation. Even if, in the long run, ‘freer’ trade deals are agreed with other trading blocs, it will be many years for the near-term losses to be compensated for. There are costs of losing ‘single access’ for both sides.

Also, under BREXIT, failure to set a trade deal with the EU does not mean, as it usually does, a return to the status quo. It results in a less open move to WTO rules. Countries that have a ‘better than WTO’ trade deal with the EU – e.g. Norway, Switzerland, Canada, South Korea – and those further along in the trade negotiations – over 50 in total – would have better access to EU markets than the United Kingdom after a ‘hard’ BREXIT.

Both the EU and the UK lose trade opportunities from a failure to agree favourable terms. Currently, the EU takes c40% of UK exports. The UK takes c10% of EU exports. At the margin, it is not easy for either to substitute these patterns with new markets quickly.

Finally, there are the psychological effects on supply chains – club members tend to deal more with themselves than outsiders – even at an economic cost. There are already reports that UK companies are finding it hard to get onto the list of potential suppliers in the EU after March 2019 and attracting EU ‘talent’ is getting tougher.

There are always winners and losers when trading structures change but BREXIT, by meaning less open trade, means the average UK citizen will be poorer than would otherwise have been the case – unless there is speedy substitution elsewhere. Future politics will be judged on whether this price is material or not and on whether it turns out to be a price worth paying. It is hoped we do not have a populist, more closed economy by the early 2020s.


Turning to the Industrial Strategy released in November One of the government’s key ‘antidotes’ to BREXIT trade affects, the key point is that it presents a worthy intention to tackle the UK’s long-established and widening productivity ‘gap’ (with its closest competitors) by rebuilding the underlying capacity and export competitiveness of UK sectors, places and workers. The issue is whether it yet amounts to more than throwing everything into the kitchen sink and seeing if anything floats!

The Industrial Strategy is a long-term plan to boost productivity and earnings, based on five foundations – re-packaging the drivers of productivity as follows:

  • Ideas (innovation): raise R&D as a percentage of GDP, turn more inventions into markets, and preserve and extend collaboration between economic actors.
  • People (skills): advance technical education, STEM and retraining – raising quality, filling gaps, and spreading spatial capacity and opportunity.
  • Infrastructure (investment): expand transport, housing and digital infrastructure and use public procurement to build resource efficiency.
  • Business Environment (entrepreneurship and competitiveness):
    generate government-industry sector deals, make UK the place to start and grow businesses, and develop a fiscal system that supports scale-ups and exports.
  • Places (local capacity and competitiveness): produce local industrial and transforming cities strategies that narrow regional productivity differentials and other disparities through local leadership and co-operation between places.

The Strategy announces sector deals for the life sciences, construction, artificial intelligence, and automotive industries and proposes ones for creative industries, industrial digitalisation, and nuclear. It also intends to form a team that will support future (emerging and disruptive) sectors.

The Strategy presents four Grand Challenges for the industries of the future – aspiring to a fourth industrial revolution of technological fusion. The four are: artificial Intelligence & big data, future mobility, clean growth, and ageing society. If engaged, Dorset can feature positively in each of these areas.

The Strategy also promises a review of LEP roles. The Industrial Strategy requires Dorset to produce its own Local Industrial Strategy under the LEP’s guidance, although when, what and how this will be done is not yet clear.

The Strategy talks about the composition of the UK economy, with its world class heights but much mediocrity, as being a major cause of relatively low productivity. Any new policies to address this need to emphasize how sustained growth is generated: globally competitive productivity growth on the supply side and greater trading engagement on the demand side.

The Industrial Strategy discusses many of the ‘right’ issues and proposes to act on many of the ‘right’ levers. The timescales, resourcing and processes are unresolved, but it is a reasonable framework for future development, based, as it is, on improving national and local productivity performance.

As with all UK government’ approaches to sub-national development, however, the uncertainties are about long term political commitment and consistency, especially in an era of changing international economic relationships, and about private sector and local buy-in across industry and place.

For Dorset and its neighbours, the important thing is to improve existing economic linkages – markets, supply chains and wider connectivity – and to develop new ones. We need more connective agglomeration, higher aspirations and a positive attitude towards personal, business and community development.

The Economic Grand National

Thoroughbred or Plough Horse[1]

With the UK’s economic performance better than feared in the last half year, fuelled by robust consumer spending, but with a number of clouds on the horizon, it is a good time to look ahead and see how the economy stands.

The economy is rather like the Grand National horse race. It’s an endurance test with a number of barriers to overcome where the steeds generally move forward carefully. Sometimes the gallop cannot be sustained for long without problems building up: an overheated horse (economy) may well get pulled up.  Over a racing career (the economic cycle), the horse needs to be fed (by investment) and it needs occasional periods of recuperation (rebalancing) but, once the race is on, it only stops if there is a reason to make the horse falter.  Usually, this occurs because hurdles are put in the way that are too high for the racehorse to jump or the jockey is too heavy for the horse to carry over the distance.

There are four ways the hurdles and jockeys of economic policy can slow the horse down or, indeed, make it fall.

Monetary Policy: Monetary policy, guided by the Bank of England, is about setting interest rates to influence the demand, and setting reserves to influence the supply, of money.  Monetary policy can slow the economic horse by setting interest rates too high, too quickly and by restricting access to funds or speed it up by being “loose” on the reins.  Effectively, monetary conditions influence the height of the fence to be jumped and the style of the jockey.

Theoretically, base interest rates should relate closely to the nominal growth of GDP, linking money to the real economy.  In the UK, given an inflation target of 2% per annum and a trend real growth rate of about the same (as estimated by the OBR), ‘normal’ nominal GDP growth would be about 4.0% per annum.  With official interest rates at 0.25%, the Bank is very far from putting interest rates anywhere near this ‘normal’ rate, largely because of excess savings (driven by an ageing population) and a period of persistent slow growth.  The UK’s poor productivity performance since 2008 reflects ongoing low interest rates, because these encourage the survival of inefficient enterprise.

In addition, after Quantitative Easing and other efforts to supply money to the economy, we have huge excess reserves in the banking system.  These could be a major threat to the horse’s stability (high future inflation) if left intact.  Already, they create a ‘brake’ on interest rate increases.  Right now, the monetary fences for the horse to jump are almost imperceptible.  Moreover, in the foreseeable future, there is little expectation that interest rates will rise and reserves will fall, sufficiently to significantly slow or ‘pull up’ the economic horse.  Unless or until inflation accelerates (above target indefinitely), the monetary fence will remain low and, surely, no barrier to growth (completing the race).

Trade Policy: Trade policy sets the conditions of international exchange and regulates access to markets. It is another potential hurdle for the economic horse.  Economics teaches us that barriers to trade are ‘bad’ and free trade ‘better’ for keeping the horse running.  Trade creates more jobs through supporting a sustained faster running pace of/for output growth.

BREXIT and the policies of President Trump raise the spectre of more protectionism – higher barriers, taxes and tariffs on trade.  The key point is that all parties in the global economy are interdependent.  Economic rationality suggests both importers and exporters will not wish to put the trading system at risk.  Many ‘policy jockeys’ get this.  There is clearly, however, some present danger that political actions, couched as popular nationalism, will undermine the global trading system.  There is a risk that this trade fence goes up sharply and, at best, may slow and, at worse, unseat the economic horse in the years ahead. There is a clear downward risk to growth from trade protectionism.  But, this is not a given.  If all the negotiations go well, there could be a big upside – the promised land of the UK as a multi-agreement trading partner with all parts of the world could increase the sustained and sustainable speed of our horse.

Tax Policy: Taxes on business are used to fund public policies that intervene in the economy in order to address market failures and fund socio-environmental priorities.  The political debate about how big the public sector should be relative to the wealth creating private sector is a long-established and hard-to-resolve chasm.  But, note, public funding comes from taxation or borrowing – both require a drag on the payers.  Essentially, high corporate or sales taxes and a complicated tax code are like having a heavy jockey on the back of the business horse.

UK administrations have been reducing some corporate tax rates in recent years.  Indeed, there has been a competitive race to the bottom by some of our competitors (notably Ireland) on corporate taxes.  Furthermore, President Trump vows to join in (cutting the tax burden – rates and rules – on US corporates).  BREXIT raises the possibility of business, sales, or other UK tax rate changes in future.  It may mean UK governments have scope to simplify the system or they could be looking for ‘new’ sources of revenue.  At present, it is unclear how the UK’s competitive position on tax will evolve post-BREXIT but it is not expected to hinder the horse too much in the near future.  The tax jockey is not expected to overburden the business runner – but these could be famous last words.

Spending/Regulation Policy:  New technologies and process innovations are fuelling economic growth.  Excess regulation and non-productive state spending can hurt this growth process by putting a heavier jockey on the horse.  Too much or misdirected state spending or regulation can change a business thoroughbred into a plough horse – cutting its potential speed (of growth) over the medium term.  Alternatively, reducing business regulation could be an important mitigation for any negative BREXIT effects through trade policy.  Rebalancing from government consumption to government investment could be an important part of a new “Modern Industrial Strategy” in the years ahead.

Overall, then, monetary policies seem set to continue to support the economic horse whilst tax and regulations policies could go either way and trade policies risk hurting it.  The net balance of these factors, as the terms of the UK’s new trading relationships emerge, will be key to how the stamina of the economic horse develops in the next five years.  There is a risk that trade protectionism sets higher fences: turning our steed into a plough horse – worst case, recession.  However, there is an opportunity for a thoroughbred to emerge from good training, especially if trade deals can be done and tax/regulation policies can support growth just as monetary policy becomes ‘less loose’ or even makes a welcome return to ‘normal’.

Place your bets …. But, remember, the Grand National is a lottery.  Uncertainty is the main risk right now and the main dictator as to which horse comes first over time.

[1] Based on a similar approach to the US economy by Bryan Wesbury, Chief Economist, First Trust Portfolios, Chicago, USA

A ‘new’ Industrial Strategy

The UK economy is at a crossroads.  A turning point for growth, inflation and employment is apparent in recent data.  The BREXIT vote might have been the trigger for the change of mood because it adds a new layer of uncertainty but the economy was already going that way.  Moreover, the fundamental imbalances of the UK economy – exhibited by huge trade and fiscal deficits, now ineffective monetary policy and poor comparative productivity – have yet to be addressed – whether we voted in or out of Europe.

The ‘new world’ of external relationships, as evidenced by the 18% drop in sterling since July, implies an adjustment of costs (up) and investment (down) that will probably mean lower growth and higher inflation than would otherwise have occurred over the next few years.  Further out, the UK business sector has the ability and scope to mitigate such negative effects and, indeed, more than offset any adverse changes.  British firms and people are still inventive, innovative, skilled, entrepreneurial and competitive.  With change comes opportunity.  The big question is whether the policy regimes adopted over the next few years facilitate that process of market-led adjustment.

In the UK Autumn Statement, next month, it is expected that the Chancellor of the Exchequer will promote a new Industrial Strategy.  It is tempting to say that there is nothing new in the world of sub-national development.  A re-hash of established intervention strategies is probable, which may be no bad thing.

It is likely that the SW LEPs will be tasked to support major national investments (including power stations, runways and railways) through their activities towards future growth deals, enterprise zones and/or wider business support.  The target, as always, will be more productivity and export-led growth backed by a strong business voice.

We await the government’s ideas with both trepidation and expectation.  We hope the LEPs and their development partners are ready for the task ahead.  We will blog on the ‘new’ strategy after November 23rd, assuming enough details about the new policy approach are forthcoming.

By then, we will have a new US president-in-waiting.  With this and BREXIT dominating the macro world, these are exciting times for analysts of the regional economy and the world of local development.



The Economy – After BREXIT


On 23rd June, the UK electorate voted to ‘leave’ the EU (BREXIT). The immediate economic consequence was a collapse in Sterling, making exports cheaper and imports dearer. Over time, this might help growth and add to inflation. However, the referendum result increased uncertainty about the economic outlook and may reduce net new investment, output and jobs in the months ahead and beyond.

More firms and investors now seem less confident about the outlook for growth. The survey evidence and the forecast consensus has shifted downwards, acknowledging that there is some risk of negative real GDP growth, higher inflation and lower employment.

In addition, upheaval within the leading UK political parties, the lack of terms/a plan to smooth the UK approach to BREXIT, and concerns over the forthcoming presidential election in the United States all encourage a ‘wait and see’ attitude amongst key businesses.

With forward indicators weakening, the economy is still constrained by fundamental weaknesses: low productivity growth and competitiveness (as shown by persistently large trade deficits). For the foreseeable future, uncertainty over BREXIT will not improve these factors.

Latest evidence

  Annual Quarterly Monthly
Real GDP (%ch, yoy) +2.2 (2015) +2.2 (Q2) n.a.
CPI inflation (%ch, yoy) 0.0 (2015) +0.4 (Q2) +0.5 (Jun)
LFS unemployment (%) 5.4 (2015) 5.1 (Q1) 4.9 (Mar-May)
Trade deficit* (£bn) -36.6 (2015) -12.4 (Q1) -2.3 (May)
Base rate (%) 0.5  (2015) 0.5  (Q2) 0.5  (Jul)

Source: ONS   * goods and services

Growth in the UK economy was fairly modest and flat through the first half of 2016. Despite global/national political and economic uncertainty, as the table above indicates, real growth was maintained close to trend (just over 2% year-on-year), inflation remained well below the 2% per annum policy target (though it edged a little higher) and the drop in unemployment may have started to flatten out (at about 5%). The net trade deficit was still enormous and the loose money and austere fiscal policy stance was largely unchanged. Productivity growth remains too low for sustained and sustainable UK growth.

If real GDP growth now slips below 2% per annum, employment growth will ease or reverse and little or no improvement in productivity can be envisaged. Meanwhile, the recent (roughly 9%) drop in Sterling will boost future inflation. The economic outlook, especially in the face of having to unwind or replace trade, regulation and other business-facing agreements within the EU and other partners, has deteriorated.

Local Economy & Development

The latest purchasing managers’ index (PMI) for SW England shows SW output fairly good but employment slipping back in June. These figures were recorded “pre-BREXIT”. Moreover, the SW regional economy tended to soften through the first half of 2016.

For the PMI series, apart from momentum over time, the crucial benchmark is whether the indices are above or below 50. The former indicates growth and the latter stagnation. It will be interesting to see, in response to BREXIT, whether the next reading for SW PMI output, (to be issued mid-August), will edge below the 50-benchmark, as the UK average did in July and the SW employment index already had done in June. Thereafter, the question is whether negative “BREXIT effects” persist.

Other surveys have shown similar recent trends. For example, the British Chamber of Commerce Survey for the latest quarter pointed to “sub-par UK economic growth even prior to the EU-referendum”. With regard to the future outlook, the mood has been generally more cautious than it was, with many sectors from manufacturing, through retailing and car sales, to property and other services declaring a sudden loss of business momentum after the referendum. What little evidence we have suggests there was an immediate drop in household spending, affecting retailing, tourism and leisure locally; a decline in property movements – affecting commercial and housing sales; and a continuation of caution with respect to business investment.  We do not know whether these were temporary or persistent effects.

In response to these developments, and the aggravated risks and eventual opportunities that lie ahead, the development question is how businesses and the various public agents mitigate any negative impacts. The significant drop in sterling will help some (exporters) but not all (importers and exporters dependent on imports of components and materials). In time, the likely increase in a range of input, factory and final prices will affect some supply chains and household budgets. Moreover, there is a fear that the continuing banking malaise (with share values down sharply from already low levels) may dampen the flow of credit – a key ingredient for maintaining growth.

The Bank of England stands ready to support the financial system (e.g. by relaxing banking capital requirements, lowering base rates, and issuing more quantitative easing). It believes the banking and insurance sectors are much more resilient to shocks than they were in 2008. Also, the new “May-Hammond” Treasury has indicated that it may be more willing to borrow and spend than its predecessor. Its ‘new’ industrial/EU-funding policies, however, are far from clear, (especially as the Business Department is being reformed).

Economic Outlook

According to the latest consensus compiled by HM Treasury (see table below), growth will be very sluggish in the next 18 months. The average forecast is for growth rates well below trend in 2016 and 2017 whilst CPI inflation is now expected to exceed the target (2% per annum) during 2017 and unemployment to rise back above 5.5%.

According to these ‘experts’, the outlook has changed dramatically. Indeed, average forecasts for growth in 2017 slumped from 2.1% (June survey) to only 0.8% (July survey) after the BREXIT vote. Moreover, the current account and public debt positions are worse for 2016 and only expected to improve marginally in 2017. The Bank of England perspective (in its forthcoming August Inflation Report) is expected to show a similar warning about a deterioration in economic prospects.

BREXIT has induced a change in mood, with the consensus about economic prospects shifting markedly downwards in recent weeks. Indeed, the drop in forecasters’ expectations has gained real expression with the downgrading of UK debt by the major credit rating agencies, the drop in the value of UK banking and other stocks, and the Bank of England’s FPC recent highlighting of risks to the financial system.

UK Consensus Forecasts: July 2016

  2016 2017
Growth +1.6 +0.8
Inflation +1.3 +2.4
Unemployment 5.3 5.6
  2016/17 2017/18
Current Account (£bn) -103.1 -82.1
PSNB (£bn) 67.4 58.3

Source: HM Treasury

Some of the new negative sentiment may fade after the initial shock but the danger is that the process of extracting the UK from the EU will generate a series of economic and political ‘aftershocks’ to the markets and the real economy and this could deplete confidence at a fundamental level.

As we have written before (see previous posts), the economics of BREXIT are straightforward. In summary, the creation of economic barriers, borders or boundaries, whether real or psychological, always leads to an increase in costs. That increase in costs, exacerbated by broader uncertainty, stalls investment, reduces output and cuts employment compared with what otherwise might have occurred. Thereby, the outlook for productivity and trade deteriorates.

The resulting fall in business profits and household incomes means less revenue for the government, which requires further fiscal austerity unless the government is willing to borrow more and grow the public deficit. In turn, these factors reduce realised and potential economic activity and confidence. At the same time, as higher costs are pushed through the supply chain, more inflation is generated, which, if accompanied by higher state borrowing, means, at some point, higher interest rates – a further dampener on future domestic demand.

It is important to note that in all these economic linkages and trends, we refer to outcomes in net, macro terms. There will be companies and workers in particular sectors that will benefit from the countervailing forces that always occur within any process of economic adjustment. There will be individual ‘winners’ and ‘losers’. The key observation, however, is that the net effect, for the economy as a whole and for the foreseeable future, is one of worsening growth prospects.

BREXIT will affect many Southern businesses and households. Some of these effects will be immediate and obvious; some will be postponed and insidious and some will not have noticeable impacts for several years. But, on average, in due course, less investment means less growth and lower living standards. We must not be distracted by one-off (good or bad) data releases or items of business news over the weeks and months ahead. The important thing is the change to performance potential, and its realisation, over the long run.

In the long run (after 2020), the economy may start to recover (assuming no major global ‘shocks’) from BREXIT.   In the very long term (perhaps, eight years plus), it may be back, or even beyond, where it might have been without BREXIT. The economy is a dynamic creature made up of millions of individual and group actors with diverse characteristics and behaviours. Uncertainty creates opportunity as well as fear. Human beings are inventive, innovative and entrepreneurial, especially as new generations emerge without the baggage of history. It is reasonable, therefore, to remain a long-term optimist about the economy.

For the near future, however, the prognosis is for a period/process of negative adjustment.

  • In the short run, this is likely to harm sectors dependent on current household and business spending first, though these effects may be temporary if incomes and employment hold up over the rest of 2016.
  • In the medium term, it will be the new trading adjustments that matter: 1) sterling depreciation helping exporters unless they are vulnerable to supply chain shifts caused by political uncertainty and higher import prices and 2) trade agreements and new tariff regimes for UK businesses active across the world. Both positive and negative effects are likely to ensue here.
  • In the long run, changes to corporate investment strategies will drive the impact. It is unlikely that global companies will see UK locations and facilities as favoured areas for investment to gain access to the wider European market. Importantly, it is changes at the margin that matter, specifically the potential for erosion of commitment to existing UK operations over time. Behavioural changes will gradually impact replacement and new investment demand. In a decade, the fear is that the next family of aerospace, motors and other engineering and electronics products and services go, at least partially, elsewhere, as trading costs and regulatory frameworks adjust to a new political reality

Analysis of current economic prospects makes regional development activity to boost the drivers of productivity even more vital. The development policy and delivery question is whether the negatives can be mitigated in terms of repairing or building local competitiveness over time. Even as the BREXIT storm rolls over us, we must prepare for better days.

BREXIT 3 – the decision

A small majority of UK voters have chosen to ‘leave’ the EU.  Now we will reap the economic deluge in terms of financial market shocks, lower investment and fewer jobs.  It will take a few years for the negotiations to assert some certainty back on the future path of trade and exchange.  It will take longer for the negative effects on inward investment to work themselves out.  The UK economy will be weaker than it otherwise would have been for up to a decade.  The SW economy will be poorer as key factories and facilities across the region are sidelined or lost, many household incomes are reduced and fiscal transfer resources are diminished.

The question, then, is how we respond to and mitigate these choices and negative effects.  The next Prime Minister, as well as negotiating with all our partners, has to instigate policies that will increase investment, raise productivity and drive development whilst dealing with the probable break up of the United Kingdom.  Hopefully, by 2025-30, we can look back and say “well, it was a painful adjustment but we did it and now the future looks bright again for England” (alone?).  Today, it’s hard to look ahead with confidence but the hard work starts now.

BREXIT 2 – uncertainty voting

The forthcoming referendum on UK membership of the EU will strongly influence UK economic ‘capacity, competitiveness and aspiration’ for years to come.

Future economic performance is heavily influenced by the psychology of value and relationships.  Anything that affects business and household confidence, communications and networking, especially if it increases uncertainty, affects behaviour and changes assessments of investment priorities, as based on prospective returns, costs and benefits.  This is why the whole EU debate ‘before the event’ is inherently inconclusive.  Nevertheless, here is some discussion of the key arguments ‘for and against’ based on some economic principles and experience.

Barriers reduce economic activity

Essentially, economists know – from theory and evidence – that borders, boundaries and/or barriers to trade tend to increase costs and decrease investment.  This means lower output and employment than otherwise would occur.  Therefore, most economics-based commentators – including recent analysis from the IMF, the OECD, the Bank of England and HM Treasury – believe there is likely to be a negative economic impact from a vote to ‘leave’ compared with a vote to ‘remain’.  (Of course, that may be a price worth paying for UK ‘control’ – if you think UK-based  politicians and administrators are, or will do, ‘better’ for you than Brussels- based ones.)

What is not clear is whether the adverse economic effects of leaving the EU (termed BREXIT – short for British exit) would have lasting impact or whether these effects might be mitigated – indeed eventually overcome – by future UK measures to support domestic development.  The question to the ‘leavers’ then, is what policies would you adopt to overcome any negative effects of BREXIT?

Importantly and conversely, a ‘remain’ vote is not a vote for the status quo.  There will be changes affecting UK economic prospects within the EU/Euro-Zone whatever the outcome of the referendum – (others may leave the EU even as, within it, the euro-zone gets tighter).  The question to ‘remainers’ is how would you make sure British interests shape the EU in a way that is economically positive?

Whether the UK ‘leaves’ or ‘remains’, the economic development question is still how to improve UK competitiveness over time.  This largely means investment in infrastructure, skills and innovation that raises long-term productivity potential and performance.

In or out, the key UK economic problems of low productivity and a lack of competitive capacity – as exposed by the UK’s huge current account deficits – remain to be addressed.  Whether it is ‘stay’ or ‘go’, the real economic debate is about what is to be done about the fundamental development weaknesses.  No one is addressing this.  If ‘we’ go, there will be costs to consider but the fundamental question is the same: what sort of UK do we want for 2030 and beyond and what/how are we prepared to invest to make it happen?

Meanwhile, the EU debate has already affected sterling, increasing its volatility (so far, down when BREXIT seems more likely and up when it seems less likely) and impairing financial market sentiment towards the United Kingdom generally.  At the margin, this may affect trading values and volumes, at least in the short term.  It will also impact relative inflation and interest rates to come. The question, then, is whether UK and local business have the will and the scale to exploit any opportunities for (short-lived) competitive advantage that emerge

BREXIT will probably not save money

A key analytical conclusion is that BREXIT would not come cheap.  Most if not more of the UK tax-payers’ money allocated to the EU will still be spent: the UK government will have to decide what to do at home for the farmers, the Cornish, for supported businesses and others who now receive significant flows “from Brussels”.

Then, there will be the costs of bilateral negotiation with the EU and all other trading partners around the world.  Diplomats, lawyers and accountants are going to do well from re-writing a vast array of contracts for government and business and plenty of civil servants and business planners will be needed to advise on, and to make, all the changes.  The UK will not fill up its fiscal hole by leaving the EU.

Moreover, trade negotiations always take longer than expected & tend to produce sub-optimal solutions based on compromise.  Judging by other recent trade negotiations, it could easily take 5-10 years to extract the UK from current contracts and processes and to replace them with new ones, especially as many existing commitments to the EU run until 2020 anyway.  The uncertainty in the mean time is an indisputable bad for trade growth.

Further, we cannot assume that all partners (in and out of EU) will be willing and able to negotiate straightaway.  Will the United Kingdom be given the kind of priority it might like and will it be offered the most favourable terms (as might be expected as part of the EU trading block)?  For example, as President Obama indicated recently, US trade representatives will be much more interested in settling (or not) the proposed cross Pacific and US-EU trade deals than they will be in starting any talks with the UK alone. The same arguments imply even more to other trading blocs and emerging markets, including the BRICs.

Meanwhile, the insidious side effects of continental trade preferences and prejudices will be free to work against UK companies and workers.  (Why would EU representatives consider UK business needs unless they happen to coincide with those of their own constituents?  Why would continental businesses and politicians not try to push negotiations towards outcomes that favour their own competitiveness over others?)

Indeed, exclusion of UK representatives from EU panels on trade, products and services to do with rules and regulations, specifications and technologies might move things away from preferred UK standards.  UK trade competitiveness, already inadequate, is unlikely to benefit from BREXIT for the foreseeable future even if positive outcomes can be achieved in the long run.

Investment will tend to be lower than the baseline

Investment is likely to fall with BREXIT.  At present, major academic, scientific, technical, and industrial research budgets are often allocated and used across Europe.  In this world, UK institutions (including our Universities and businesses) often punch above their weight. This will be harder to do after an exit poll.

Then, if you are a foreign-owned, UK-based multinational, faced with the uncertainty as to the eventual effects of a ‘leave’ vote and what it might mean for your business, at the very least, you will:

  • Wait and see – delay or cancel current investment plans – and/or
  • Re-direct investment to facilities still likely to be in the EU or in low-cost centres elsewhere – and/or, at worst, eventually
  • Close UK operations and supply EU/UK markets from elsewhere.
    As foreign direct investment softens, all this is bad for UK investment, exports, productivity and jobs.

Equally important is the wider effect on foreign direct investment.  Fewer non-European firms will see the UK as the best place from which to serve European markets and some of those who have, or would have, moved here from Europe because of the English language, more flexible labour markets, lower taxes and overall business friendly environment, will re-direct towards key EU markets, viz Germany et al.

These reactions mean less spending in the UK economy, lower output and fewer jobs, lower productivity and worse competitiveness.  Living standards will be lower than they might otherwise have been.

Even purely domestically orientated firms and consumers, facing uncertainties about the future prospects generally, may delay expenditure plans, weakening growth.  Moreover, relative UK borrowing costs (interest rates) and sterling volatility will rise, especially if expectations about future UK inflation increase above the continental norm, as they did in the 1970s.  Fiscal management and public borrowing could be disrupted, at least for a while.

Uncertainty and the creation of barriers to exchange damage the wealth creation process by reducing investment from trend and over the cycle, at least until all the new policy/trade arrangements are resolved and activated.

Labour markets will be softer and migration uncertain

If the UK leaves the EU, some workers will face a potentially more restricted labour market and adverse skills environment.  Job creation will be muted by the overall relative reduction in output and investment.

It is more debatable as to how net migration flows will be affected – that depends on what an ‘out UK’ chooses to do on border controls and working/residence visas, as well as how the EU ‘retaliates’.  The message here is that the more we restrict access, the less likely we will get favourable trading and labour relationships from our neighbours. The extent to which that is a ‘trade-off worth making’ is a political as much as an economic decision.

Generally, however, the continental/global opportunities for UK talent and domestic business access to external talent may be more comparatively constrained, at least as long as the period of adjustment to the new reality persists.

The long run is a ‘known unknown’ for the voters

In the long run, it is quite feasible for a positive relationship to arise between an “outside UK” and an “ever closer EU” (or at least more integrated Eurozone) and other parts of the global trading world.  By 2030, no economist, let alone politician, can say whether we will be better or worse off ‘in’ or ‘out’ of the EU.

All we can say is that the economy will be different and there will be winners and losers: some workers/households and some businesses/sectors will face worse prospects and some might get better ones.  Inventors, innovators and entrepreneurs will still exist.  They will adjust to the new realities and emerging incentives and act. There is no reason to be pessimistic about the inherent creativity of human beings in the economy over the long run.  It is the adjustment process from here to there that is uncertain, disruptive and potentially costly.

Sector concern

There has to be some concern for key export industries, such as aerospace (what happens to Airbus’ productive structure and supply chains over time – will French and German bosses in Toulouse change patterns of productive location and buying?.  What happens to foreign owners’ decision-making generally with regard to the spatial placement of future investment?  The SW aero-clusters are vulnerable in the long run.

Moreover, how will financial and other high value services (who can site many activities almost anywhere in a global, digital world) respond to changes in market access driven by the prospect of different requirements and rules, for example, between Frankfurt-Paris and London?

As European attitudes and confidences shift, there will be unpredictable effects on the ‘visitor’ economy, retailers and, indeed, universities/student flows, particularly if sterling moves adversely.  Will Dutch holidaymakers still want to visit SW England and will SW holidaymakers still want to visit the Continent?


Some of the main economic effects of BREXIT will occur through short-term decisions about trade and investment, but there will also be long-term effects as demand patterns and productive and trading structures adjust.

In the years after a ‘leave’ vote – possibly over a decade or more, increased uncertainty will cause the economy to grow less, than it might otherwise have, in terms of output, jobs and incomes.  This is not to judge that BREXIT is right or wrong, per se, as a political or social choice.  It is just to acknowledge that the economics is clear – it is not a cost or risk free option.

But, then, neither is ‘remain’.  Even after a vote to stay, there are bound to be ‘unforeseen’ consequences, as the EU, and the EZ within it, changes.  If the UK votes to ‘remain’, it still has to deal with the German/EZ desire to forge an integrated core based on tight policy rules and regulations and fiscal unity – arguably distinct from the wider EU.  Moreover, there are some ‘dodgy’ candidates for EU membership knocking at the gates. The risk is that we stay in a ‘club’ that develops a strong, two-tier membership and that our sensible aversion to the euro means we are in a group with the dross rather than the elite.

“Remain’ is not a ‘failsafe’ option because it could mean we are more of a ‘decision taker’ rather than a ‘decision maker’.  Furthermore, it does not absolve us from decisions about how our economic future will evolve, including how we address longstanding economic deficiencies at home and how we cope with a change of power relationships abroad.

Damned if you do and damned if you don’t. The key is that, either way, the development priorities remain to be addressed: the only security for future economic health and wealth is that the UK economic team plays at the top of the productivity premiership.  As with AFC Bournemouth, which has survived its first season in the top flight of English football, the trick is now to consolidate and develop the economy further to stay in the running and ‘win’ over the long term.


Next Generation First – UK Budget 2016

Another complicated budget from Chancellor Osborne.  Lots of tinkering with the tax and spending systems in Conservative ways that may distract from the gloomier economic numbers and the further austerity to come.  That is not a criticism just an observation.

Let’s start with the macroeconomics.  A slowing global economy, fragile financial markets and low productivity growth everywhere sees the Office of Budget Responsibility cutting its growth and inflation forecasts and, crucially, its assessment of future productivity potential.  With employment still set to be the main engine of growth, UK real GDP is said to rise only 2% in 2016, down from 2.4% as forecast as recently as early December.  The OBR could still be optimistic for this year, especially if BREXIT uncertainty increases and cuts investment and consumption even more than currently expected.  Despairingly, only 2.1% growth is now seen as the underlying trend for this Parliament even if EU membership is retained.  Inflation only returns to target (2% per annum) in 2018:  a sorry tale, which monetary policy, with the threat of negative interest rates, is not helping.  (Alarmingly, the FPC has been told to be particularly vigilant over the state of the banking system from now on.)

The economic forecasts mess up the government finances, keeping borrowing up in the near term and worsening debt ratios over the forecast period (debt/GDP 82.6% in 2016/17 and only down to 74.7% in 2020/21).  The fiscal surplus target is delayed until 2019/20 – just in time for the next election when the Chancellor might be tilting for another job?  Against this background, government spending is set to fall from 40% to 36.9% of the economy by 2020, as the government departments seek to find another £3.5bn a year by 2019/20.

The state is seeking to get more funds by finding £12bn from further measures to cut tax avoidance and evasion.  Promise of a further cut in corporation tax to 17% and reductions to business rate thresholds, commercial stamp duties, and oil and gas taxes is offset by attacking loopholes, mainly exploited by large corporations.  The Chancellor is selling a theme of large companies pay more and small companies pay less.

Other goodies are offered in the great devolution dance, for the national administrations and the English regions.  From halving Severn tolls in 2018 to a combined authority for East Anglia, the Treasury offers a plethora of devolution measures that may yet turn out to be more mirage than substance, especially if you have not got an elected Mayor.  The aim of 100% of local authority resources being raised and spent locally by 2020 is a transformation that could turn out to be highly stimulative and yet highly divisive.  Yet another experiment in local development that may or may not be real before it becomes politically unacceptable.  It is interesting that the Treasury is cutting business rates just when they are going to devolve them to local authorities!

This Budget claims growth is driven by infrastructure, education and enterprise.

  • On infrastructure, the government will commission various road and rail schemes in the north (M62 widening/HS3 rail Man-Leeds/Man-Sheff tunnel), London (cross-rail 2 but nothing on a 3rd runway) and the South West (rail resilience).  Meanwhile the insurance premium tax goes up another 0.5% specifically to pay for flood defences.
  • On education, all schools are to be, at least, on the way to Academy status, independent of local authorities, by 2020.  There are plans to boost performance in northern schools and to devise a new funding formula for all schools.  On childhood obesity, the government is introducing a levy system on soft drinks in 2018 in order to promote more sport and other activities ‘out of’ normal school hours.
  • On enterprise, class 2 national insurance contributions will be abolished in 2018, (helping the 3mn or so self-employed), most indirect taxes remain frozen, and capital gains taxes are cut from next month (base 18% to 10% and higher 28% to 20%).

Finally, with regard to personal taxes and savings, everyone’s finances are helped.  For example, the personal income tax allowance will rise from £11,000 to £11,500 in April 2017 and the higher rate threshold will reach £45,000.  The Chancellor also announced measures to help the under 40s to save, recognising the bewildering position that exists at present with pensions and other investment opportunities in a world of zero interest rates.  The existing personal ISA limit increases from just over £15,000 to £20,000 in April 2017.  A new “Lifetime ISA” will be created for the under 40s and until you are 50.  As long as it is to be used for long-term savings (pensions or housing), savers can put £4,000 into this ISA and the government will add £1,000 per annum.  Te help to buy ISAs (only just started) can be rolled into this new Lifetime ISA.

The budget is being headlined as one that puts the “next generation first”.  Many parts of the Budget come later rather than sooner, however.  There is a lot of detail to be worked out and many consultations to conduct before those details are finalised.  Moreover, there are negative aspects in the detail yet to be analysed.  Overall, the real worry is still in the macroeconomy.  If realised, the wider risks could blow all these complicated fiscal measures and intentions out of the water.



2015 revisited – 2016 considered

The latest numbers show UK real GDP growth slowing from 2.9% in 2014 to 2.2% in 2015.  The year ended with a 0.5% quarter-on-quarter rate of increase in the last three months of the year: services continued to thrive but manufacturing and construction were soft.  At the same time, there was no inflation (CPI average) last year whilst unemployment dropped towards 5%.

In simple terms, the UK economy is being driven by employment growth and, with little or no productivity growth and adverse external factors – (China, oil and stock markets, Middle East and immigration, Brexit etc), current economic momentum is not sustainable.  Further slowing of growth is expected in 2016.  We are not yet talking about a return to recession but, with our real growth forecast now expected to be 1.6%, it looks like being a sluggish year ahead.

Autumn Statement – fortune favours the brave

In headline terms, the Chancellor’s Autumn Statement/Comprehensive Spending Review surprised many commentators, from its withdrawal from cutting tax credits to its lower than expected percentage cuts in many departmental expenditure settlements.  Nevertheless, overall, it remained an austerity budget based on higher taxation and lower public spending.  It is a settlement that, if fully enacted, will, itself, tend to detract from economic growth over the next five years.  Some of the measures, however, will re-direct activity to the private sector and, in theory, might ‘crowd in’ more private activity.

These ideas should be evident in the macroeconomic forecasts published by the Office of Budget Responsibility at the same time as the statement.  In fact, the forecasts offered are remarkably flat.  If the OBR is right, we are in for a period of rather boring overall macro trends with subdued growth in output and investment, in inflation, and in employment and productivity, leading to a gradual improvement in the public finances (see table).

OBR Forecasts November 2016 2015 2016 2017 2018 2019 2020
Real GDP (%ch pa) 2.4 2.4 2.5 2.4 2.3 2.3
Inflation (%ch pa) 0.1 1.0 1.8 1.9 2.0 2.0
Employment (%ch pa) 1.3 1.3 0.6 0.6 0.3 0.6
Productivity (%ch pa) 1.1 1.1 1.9 1.8 2.0 1.7
Investment (%ch pa) 6.1 7.4 7.1 7.0 6.6 4.5
Unemployment rate (%) 5.5 5.2 5.2 5.3 5.4 5.4
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
Deficit borrowing/GDP (%) 3.9 2.5 1.2 0.2 -0.5 -0.6
Debt/GDP (%) 82.5 81.7 79.9 77.3 74.3 71.3
Source: OBR

The more interesting facets of the announcements are micro in nature.  The local impacts of the devolution measures on governance and business rates, conformation of local development ‘growth deal’ funding, the creation of more enterprise zones, the infrastructure and house building proposals, and the buy-to-let stamp duty, apprenticeship levy and other taxes may have a profound effect on the way local economy’s develop over the next five years.  Although the central view is that this will not affect very much the underlying potential growth rate of the economy as a whole, there is plenty of cope for unforeseen consequences and distributional effects to be significant.

In SW England, we will be particularly intrigued to see how plans for devolution, (particularly the prospect of local government rationalisation in Dorset), and the new/extended enterprise zones at Dorset Green (Wareham), Bristol and Bath/Somer Valley, and Heart of the SW (Exeter and Bridgwater) will develop.  History suggests our expectations should be cautious … but, perhaps, fortune favours the brave.


Growth & Interest Rates

The SW purchasing managers’ indices (PMI) for October (just released) rebounded a bit from September’s lowish levels.  The UK recovery appears to be intact but it has slowed from the pace set earlier in the year.  Indeed, the PMI series peaked in January 2014 and they have tended to drop since then.  The latest output and employment balances were 54.1 and 52.6 respectively: the former was the eighth highest and the latter tenth highest (of 12), showing that the recovery is softer locally than in most UK regions and devolved administrations.  The slowdown is most evident in the weakness of new orders and business outstanding.

According to the Bank of England’s latest Inflation Report (November 2015), the softening of growth reflects international factors, especially slower growth in China, emerging markets and the EU.  These dampening effects come directly through physical trade but, more importantly, indirectly through financial exposures and markets: commodities, bonds and equity prices have all fallen in recent months.  Comparatively, the domestic economy is more robust, lead by some emergence of real incomes growth (+3%) and, at last, some positive change in productivity in Q2 2015 – although, so far, most of the recovery has been driven by an increase in hours.

Inflation remains about zero, largely reflecting the decrease in world import prices.  Core UK inflation is said to be more like 1% with wage increases starting to build price expectations.  The Bank says that interest rates will rise over time but, right now, it is signalling a further delay in the needed upward adjustment in base rates.  A return to ‘normal’ base interest rates of 4-5% is considered unlikely for many years.  An increase to a range of 2-3% would be welcome for normal economic working/incentives but is also probably more than two years away.

Inflation will start to rise as last year’s major drop in oil and other global prices fall out of the annual calculation.  This should mean an end to nearly 7 years of 0.5% base rates is imminent.  Central Bankers remain cautious, however, and there is a risk that policy increases come later and then have to be larger than might otherwise be necessary.  A slow rise to 1-1.5% over the next 12-18 months seems advisable but the resistance to action remains strong.  The danger is that tool little too late means more volatile adjustments … even renewed recession … in due course.

The recovery is less strong than it was.  The winter will probably see only modest growth.  SW businesses face a more difficult economy in 2016.