Tue, Nov

The 2016 economy and you

Should we make confidence our guide as we consider the economic landscape in which we’ll be working this year. Walter Hale provides an overview. 

Brace yourselves: 2016 will not be as smooth as predictions of a 2.4% growth in UK GDP might suggest. An EasyJet/YouGov survey of small businesses in December 2015 found that only 56% of respondents thought their company would grow this year. And very few expected to expand their business by 10% or more.

Yet if you crunch the numbers that are crucial for understanding the UK economy’s performance, this sounds unduly pessimistic. In its economic forecast, accountant PwC suggests that the UK economy will continue to grow steadily in 2016, driven by consumer spending and business investment. It predicts that every region will experience decent growth (of at least 1.6%), although London and the South East will lead the recovery once more, expanding by 3.1

Ideally, analysts suggest, the British economy should become less reliant on London and the South East. The government has effectively conceded the point, by devolving power to some cities and giving its backing to such projects as the Northern Powerhouse and the lesser known Midlands Engine, but such initiatives are unlikely to have a big impact on regional growth in 2016.

Consumer spending is forecast to increase by 2.7% this year, reflecting the cumulative impact of jobs growth, higher personal tax allowances and cheap mortgages. The mix of consumer spend will change subtly over the next five years - less on food and clothing, more on housing, utilities, and leisure-related activities - but PwC predicts 3.1% growth for the distribution sector (including retail, hotels and restaurants) in 2016, lower than in the past two years, but still pretty good news for wide-format printers. Two international sporting events - football’s European Championships and the Rio Olympics - could provide a nice windfall for British business (especially with England, Wales and Northern Ireland all qualifying for the former.)

Manufacturing is tipped to resume modest growth (1%) in 2016, while construction will expand by 2%. Services remain buoyant and PwC forecasts may be worth more in terms of UK exports than manufacturing by 2020. The other encouraging trend is that, since late 2014, productivity in the UK - if you ignore financial services, energy and the public sector - has grown significantly.

So why are so many of SME owners so glum? Many are probably concerned about the cost of the National Living Wage which has been estimated, by the Office for Budget Responsibility, at around 1% of company profits. On top of this, many smaller companies are still struggling to implement pension auto-enrolment in 2016/17 and are vexed by the apprenticeship levy. A slew of surveys suggest that the most likely impact of the Living Wage is to make companies think again about hiring. It remains to be seen whether all this will wipe out a little, some or all of the gains businesses will derive from lower corporation rates, which will fall to 18% in 2020, the lowest in the G20.

Confidence is key in business and, in an age of 24/7 news, the financial sector is far better at transmitting panic instantaneously around the globe than it is at sharing good news (which, by its very nature, is less likely to hog their headlines). The Stock Markets’ fixation on China’s growth is a case in point. The world’s second largest economy may only grow by around 6% in 2016 but this ‘new normal’, as they call it in China, is a figure that would have many other countries’ finance ministers turning dollar bill-green with envy.

As fashionable as the narrative that China’s slowing growth will wreck the global economy has become, the country’s economic performance certainly doesn’t, in itself, justify the kind of Chicken Little ‘the sky is falling’ alarmism we saw in late 2015. The pessimism certainly doesn’t take into account the likely effect of a drive by the Chinese government - and ecommerce giants such as Alibaba - to develop the rural economy.

PwC forecasts a 3.5% growth in the world’s economy in 2016, with some countries performing much better - notably Ireland and Nigeria (both forecast to grow by 4.5%) and Indonesia (4.1%). The economy of India, the seventh biggest in the world and our 14th largest trading partner, is expected to grow by 7.9% this year, presenting a great opportunity for British exporters. Unsurprisingly, PwC’s experts are less bullish about the Eurozone economy, which they expect to grow by just 1.6%, though they are more optimistic about Poland (3.4%).

The emerging economy that poses the biggest threat to global economic stability in 2016 is probably Brazil: the country’s GDP is shrinking faster than at any time since the 1930s, inflation is stuck at over 10% and the currency has collapsed. The International Monetary Fund may have to pay the Brazilian government a visit. Luckily the UK’s exposure to Brazil is minimal - we do more trade with Denmark - and, unless the South American giant’s troubles spark a global stock market slide, it should not do much harm to UK plc.

The biggest questionmark hanging over the British economy in 2016 and beyond is the risk of ‘Brexit’, British withdrawal from the European Union. The known unknowns here are: we can’t predict the outcome of the referendum; exactly how long - if we vote for ‘Brexit’ - our departure will take to negotiate (it certainly won’t be an overnight affair as some Eurosceptics fondly imagine); and what the consequences of such a move would be.

Even Europe’s top economists can’t agree whether ‘Brexit’ would be a good or a bad thing for UK plc. As the campaign gets underway, economists will be lined up like expert witnesses on opposing sides in a murder trial. Dario Perkins of macroeconomics consultancy Lombard Street does not foresee any huge impact, but many worry that the ensuing uncertainty will undermine confidence and lower investment, trade and consumption in the UK. Sony Kapoor at think tank Re-Define told the FT: “The UK’s loss will be Europe’s gain as investors, manufacturers and talent flee the legal, political and economic uncertainty in the UK for the relative safety and stability of the Eurozone.”

Nick Bosanquet, a health economist at Imperial College London insisted: “’Brexit’ will not happen - there will be a similar majority to 1975.” (For those too young to remember, 67% of voters opted to join the EEC in 1975.) In case anyone doubts Bosanquet’s grip on reality, he won £500 predicting a Conservative majority at last year’s general election.

So it is terribly hard to predict what will happen to the UK economy in 2016. There are a lot of unpredictable factors that could change the outlook in an instant - more natural disasters, a Donald Trump presidency, or another referendum on Scottish independence. And yet, despite the bearishness of many SME owners, the basis of the British economy remains pretty sound.

The UK is growing faster than France, Germany or Japan. Inflation is likely to remain below the Bank of England’s 2.0% target and, with wages growing slowly and productivity improving, there seems little point in raising interest rates. Our public finances, though not in as good a shape as Chancellor of the Exchequer George Osborne hoped, are in better shape than at any time since the global financial crisis.

You could argue that the biggest threat to the UK economy is psychological - not quite as simple as ‘we have nothing to fear but fear itself’ but certainly something along those lines. As a species, humankind is not hard-wired to manage uncertainty but that may be the critical skill for wide-format print service providers in 2016.


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