What’s in store for the UK economy in 2018?

Santa has been and gone, the sleigh is parked in the long-stay car park, the reindeer are out to graze for a few months and it is time to think about what 2018 will have in store for the UK.

However economic forecasting is difficult. Unlike the natural sciences, such as physics and chemistry, we cannot base our predictions on previous laboratory experiments. Furthermore, although economists frequently assume “ceteris paribus”, the real world is not like this. For example, we do not know what the outcome of the Brexit negotiations will be, whether the bitcoin bubble will burst, and, if it does, what the impact will be, whether there will be a new Prime minster  or a general election this year or even what will happen to oil prices.

In an article published in the last week of 2017, The Times examined predictions made by key economic bodies (the Bank of England, the CBI, the Office for Budget Responsibility, the Institute of Financial Studies and the British Chambers of Commerce) a year ago for the economy in 2017. As the table below indicates, the results are not encouraging.

  Growth Inflation Unemploy-ment Wage Increase House-hold Spending Increase
End 2016 Figure 1.9% 0.7% 4.9% 2.8% 2.8%
Highest prediction for 2017 1.6% 2.7% 5.4% 2.75% 1.5%
Lowest prediction for 2017 1.1% 2.1% 5.1% 2.1% 0.6%
Actual figure for 2017 (latest estimate) 1.7% 3.1% 4.3% 2.5% 1.0%


The UK’s growth performance has dropped from first place among the G7 in 2016 to close to the bottom and, in addition to the data above, we should note that share prices in the USA and the UK are at record highs, as is employment in the UK. However particularly worrying is the fall in real incomes which has impacted on consumption growth.   UK productivity growth has been low, with businesses tending to increase labour rather than spending on capital. Although the very latest figures show an improvement, this is because hours worked have dropped rather than output increasing. In addition, house price growth, particularly in London, has slowed.

In thinking about what might happen to the UK in 2018, there is the old saying that “when America sneezes, the world catches a cold”. This is still applicable but we might include China since the performance of the world’s largest economies will have both direct and indirect effects on the UK, since their faster growth will directly impact on our export sales and indirectly as rapidly growing demand for raw materials overseas pushes up prices for UK firms and consumers. On the other hand, we do not know whether President Trump’s desire to implement policies  focussing on “putting America first”, will have an impact on the rest of the world.

The IMF is positive about the prospects for the world economy in 2018. It predicts that world GDP will grow by 3.7% and this recovery is likely to continue for a further four years. This faster growth is the result of the three main economic areas (North America, Asia and Europe) all recovering rapidly at the same time. Businesses in the USA and France are confident following the election of business-friendly Presidents Trump and Macron, and this confidence should have a positive impact on investment. In addition, even though there have been interest rate rises in the USA and the UK, the level of world interest rates and the positive effects of QE continue to facilitate growth. The IMF therefore expects that average unemployment in the G7 will drop below 5% this year for the first time since the 1970s while inflation will remain below 2%.

Time to feel sorry for economic forecasters.




The UK Economy – how are we doing?

Since the Brexit vote ten months ago, there have been many reports about the state of the UK economy and its prospects for the future. In an ideal world, we could look at the recently-published data and decide how we are doing. Unfortunately, the picture is unclear with different data sets indicating different things.

On the positive side, unemployment has fallen to 4.7% and employment has risen to almost 75%, both numbers reaching impressive lows and highs respectively. What we would also expect to see simultaneously is an acceleration in wage increases as workers take advantage of a tighter labour market indicated by  low unemployment, high activity rates and employers reporting recruitment difficulties, with the effect magnified by an increasing number of migrant workers returning home because of the fall in their incomes when exchanged into their own currency due to the fall in sterling since June. However, money wages are rising at only 2.3%pa and, as inflation increases, real wages will fall. Possible explanations for the low average increase in wages are the 1% cap on public sector pay increases thereby reducing the average, a possible increase in retired workers returning to the labour force depressing wages and the increase in self-employment since the self-employed are not counted in the data.

Other positives for the economy are our growth rate, the reduction in government borrowing and improvement in the  balance of payments. Our annual GDP growth of 1.8% has been the second highest in the G7 behind only Germany at 1.9%. However there is concern that consumer spending, which has been an important contributor to the UK’s growth, is now slowing.  Further factors which might impact on consumer spending are the expected fall in real income, mentioned above,  and the slowdown in the housing market which, according to the Halifax, grew at its slowest rate for four years.  The housing market is important for an economy in terms of the wealth effect, its impact on consumer confidence and the effect it has on related markets, such as carpets, furniture and household appliances, which people buy when they move.

The slowdown in consumption growth, and therefore probably GDP growth, is such that the Bank of England is now thinking that the increase in interest rates which has been talked about for some time, is likely to be postponed from late 2018 until the middle of 2019. It will then be almost twelve years since the last increase in UK interest rates which took place in July 2007 when they were increased from 5.5% to 5.75%.

The Public Sector Borrowing Requirement (PSBR) has come in below expectations and is now back to levels experienced before the financial crisis. This is largely due to  income and corporation tax revenues being greater than predicted. However, if the economy slows down in the run-up to Brexit, tax revenues will fall and benefit payments increase, increasing the PSBR.

The current account deficit dropped from 5.3% to 2.3% of GDP in the last three months of 2016. Unfortunately this proved to be a temporary improvement and the deficit has widened again this year. This makes it clear that devaluation alone will not be sufficient to improve our balance of payments and significant structural changes will also be necessary to improve the attractiveness of UK products. (Consider Germany which has a current account surplus equivalent to 8.7% of GDP not because of cheap goods but because of high quality, well-designed products). FDI increased in the last quarter of 2016 but a worrying development are recent surveys which have found that the UK has fallen in attractiveness as an overseas country in which to set up compared to other countries.

On the positive side, we could be in Greece where unemployment is 23%, and average wages have fallen approximately 10%, income tax has been increased from 40% to 47%,  the retirement age has been increased from 60 to 67 and  pensions have been cut 14 times compared to 2009.


Housing benefit in the UK

Paul Johnson of the IFS explores the changing role and nature of housing benefit in the UK. As a result of successive government policies, housing market forces, and social trends, UK’s housing benefit runs into the tens of billions of £’s every year – more than we spend on policing. Conservative policy in the 1980’s intended to make home ownership more affordable to low income households has the unintended consequences of increasing rents for future generations and higher housing benefit costs for taxpayers. The problem has been exacerbated by subsequent governments policy of leaving house building to the private sector. Furthermore, rising population and smaller family sizes means more demand, insufficient supply, but rooms laying idle as people sit on their assets as prices continue to rise. Analysis looks at the causes of the situation and potential solutions. As ever, there are costs and benefits, and different people hold different views. My personal opinion is that benefit caps and bedroom taxes are going to make little difference. We simply have to build more houses, and if the private sector won’t do it, the state will have to step in.

To listen to the full broadcast click the link below.