Brexit and rising costs ‘key villains’ in poor London data

The underlying strength of London and UK business is being choked by uncertainty, argues the ICAEW’s business team.

October 2019

On 9 September, the UK had a much-welcomed good news story, with GDP increasing 0.3% in July. Higher than economic forecasts, this was somewhat unexpected with many thinking the UK would slip into a recession as Brexit uncertainty continues.

But don’t jump for joy just yet. The UK avoided recession by the skin of its teeth as shown by the underlying data coming in from various sectors, along with continued negative business confidence (see Property and IT drive down confidence in London).

And according to ONS data, London showed no economic growth in the last three months of 2018 despite being seen as outstripping growth of other regions since 2012.

Businesses are referencing time and time again the need for certainty. Government activities on export growth, productivity rates and payment terms are admirable and absolutely needed. But the economy will not feel the benefits of these activities until businesses have the certainty needed to make proper longer-term plans.

In the service sector, which makes up over 90% of London’s output, growth was sluggish in August with margins being squeezed and business investment contracting. The good news story of a strong labour market is seeing rising wage costs, and overheads are getting higher with increases in energy costs.

And 2019 so far actually represents the worst performance for the service sector since the 2008 financial crash.

According to the latest IHS Markit/CIPS UK Manufacturing PMI, new factory orders in August contracted at their fastest pace since 2012. For July, the same month where we saw growth in GDP, the UK Manufacturing PMI was at a seven-year low with stockpiling increasing.

Hit by ongoing trade disputes between the US and China, factories were also seeing European orders fall as supply chains are changed ahead of the 31 October Brexit deadline. Despite London being the UK region with the least proportion of the population dependent on manufacturing activities, the financial and related professional services sector would suffer off the back of a weaker manufacturing sector.

For retailers, footfall has been declining all summer. A glimmer of hope is that online sales are holding strong, saving retail sales from a fairly disastrous May 2019.

In that month, retail sales saw the biggest decline on record off the back of unexpected weather. Some of this decline was clawed back in June and July when summer finally arrived. The retail industry is important to the London economy, with around 40% of all money spent in London spent within the sector.

Optimism in the manufacturing sector in August was said to be at its lowest levels since IHS Markit and CIPS added a confidence question to their survey in 2012. This is similarly reflected across multiple sectors. ICAEW’s own Business Confidence Monitor has seen negative confidence for the past year. 

As with much of the data above, Brexit and rising input costs are key villains.

There are, however, significant positives underlying all of this negative data, which can be unleased with greater certainty on what the business environment looks like after 31 October. The UK has a remarkably buoyant labour market, with the lowest unemployment rate since 1974, which is propping up consumer spending.

Wage growth, including bonuses, rose at an annual pace of 4% in May to July, outstripping inflation of around 2%, so people have more money in their back pockets. The trade deficit is narrowing as businesses look at their supply chains and reduce the amount of imports.

For certain regions around the UK the value from Big Data and Artificial Intelligence is starting to show in mid-market organisations and, for now, a weaker pound is benefiting those exporters that do not also import their raw materials.

Businesses are now at the point where the vote in 2016 is largely irrelevant. It is the ongoing uncertainty over our future that has business in a choke hold. The outlook for economic growth in the UK will depend on the way the UK’s departure from the EU is resolved; after this, work to address productivity and structural issues is more likely to succeed.

When GDP data for August is released on 10 October, will businesses have any more certainty on how their futures look?

Rachel Underhill is ICAEW's Business and Industrial Strategy Manager 

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