Could the disruptive power of Brexit and Trump be too much for the British economy?
At Royds Withy King we travelled across the UK, in partnership with HSBC, to see how the UK economy is faring while the government tries to find a viable position to start its exit from the EU in 2019 – and all against a backdrop of unstable geopolitics in the era of Donald Trump.
These huge questions – sources of uncertainty to business owners up and down the UK – were tackled with vigour by Mark Berrisford-Smith, HSBC’s head of economics for its UK commercial banking operation, in the keynote address at a series of Economic Question Time events. These Economic Question Time events are run annually in partnership with accounting firms Bishop Fleming (in Bath), Shaw Gibbs (in Oxford) and Morris Owen (in Swindon).
In his address to business leaders, Mark Berrisford-Smith painted a picture of slower growth than expected for the UK, due to Brexit and other uncertainties, but still found reasons for optimism.
“We have just had the two best years for the global economy since before the financial crisis struck in 2008. Every major economy bar one has seen its speed of growth increase. The tide is turning a bit now, with a slowdown this year, but it’s not dramatic.”
“Brexit and other worries won’t derail UK economy in the long run, even if the ride is sometimes bumpy”
– HSBC’s head of UK commercial banking, Mark Berrisford-Smith.
While acknowledging the “mysterious absence of inflation and too much debt” in the global economic picture, Mark Berrisford-Smith also noted how the global distribution of debt has mostly shifted from previous hotspots like the US housing market and the UK financial system to an increasingly indebted China.
“Credit is getting tighter again now, in a global context. Most economies have been growing faster but now we have this slowdown coming through. It means 2018 won’t be as good as 2017 and central banks are starting to think about raising interest rates. So far, though, only the US has done this meaningfully – its seven interest-rate rises are more than the rest of the world’s major economies combined.”
In one sense, Mark Berrisford-Smith said, the US central bank’s position on interest rates is heartening – “it’s getting on with getting back to normal,” he noted – but for other central banks there is still a lingering and real concern that they will lack the ammunition to tackle a future downturn while interest rates stay low.
On the next downturn
And what about the next global downturn? Are there any signs that it’s coming?
The economist said there was really not much way of knowing when the next downturn would hit, given the number of variables at play.
“It might turn up in one year or in five. A few signs of stress in a few economies isn’t enough of a signal in itself.
“The point is, governments and central banks do like to be able to act whenever a downturn does arrive. But governments are mostly more indebted than ever and interest rates are low nearly everywhere. The UK’s debt-to-GDP ratio is now about 85 per cent, which is double what it was when Gordon Brown was Chancellor in the late 1990s and early 2000s.”
Trade wars and Trump
Alongside the vulnerability associated with this growing debt burden in a context of patchy growth, Mark Berrisford-Smith also touched on the geopolitical headwinds fanned by Donald Trump.
“President Trump blows hot and cold and that unpredictability is a challenge,” he said.
“It’s love and cuddles one minute; fire and fury the next. There’s no escaping that the world’s major power blocs are now in an unfolding trade war. Trump fired the first shots (…) with tariffs on steel and aluminium, and there’s been retaliation by China and by Europe. Next in the firing line will be European cars, though there are at least some signs of a softening of the US position in relation to mooted restrictions on Chinese investment in the US. The question with any of these changes of heart, however, is how long they will last and what damage will get done along the way. Trump is not good for the global economy, or for political risks, because he creates uncertainty.”
Sterling’s shock and Brexit
When it comes to Brexit and its impact, Mark Berrisford-Smith talked first about the currency shock it precipitated when the vote was confirmed.
“Sterling fell 15 per cent in the wake of the vote. It’s not all a direct consequence of the decision to leave the EU, but the upshot has been more expensive imports for one. While 60 years ago a currency shock would have been good for the UK because it’s good for exports, this time around it has created price inflation of 3 per cent and earnings have not kept pace. So people in real terms are worse off, and this squeeze on incomes also slows growth.”
The slowing of spending on the high street is something Mark Berrisford-Smith also puts down to consumers falling out of love with shopping as a leisure activity, as ecommerce has created new models of convenience purchasing from home and via mobile devices.
“You can argue that’s a boon of modern life: the freedom not to go around supermarkets. I certainly experience it as a good thing! But the associated pain on the high street is there to be seen – spending is not yet shrinking in the UK but growth has slowed and in Germany, for example, spending is actually falling now.”
Yet it’s not necessarily one-way traffic on spending and growth, Mark Berrisford-Smith added. Inflation has ebbed and earnings growth is running a little faster, while in April and May the signs are that high-street spending improved.
“It’s not all bad news, then. We are not about to see a sudden leap to the sunlit uplands in economic terms, but there is still some sunshine piercing the gloom. Exports have also improved and the UK has become a net exporter of crude oil for the time being.”
A close-up on the local economy
The British economy is powered by innovative businesses, and hardworking people spotting opportunities and making a difference. As we travelled around the UK we spoke to a number of business leaders who told us about the challenges they are facing, and how they are staying ahead of the curve in a time when uncertainty is widespread.
On growth and Brexit
In terms of recent trends, the UK’s annual growth rate now typically hovers between 1 per cent and 2 per cent, where in recent time it used to run at more than 2 per cent. So the economy is still growing, but more slowly.
“This is in part down to some short-term uncertainties arising from Brexit, which is a real confusion for everyone. It’s clear that the UK needs to get a move on as its position is hard to understand simply because it just hasn’t been articulated. And the UK remains in a flap over customs arrangements, which doesn’t help matters.”
More may be known in July, with a positioning paper due, said Mark Berrisford-Smith, “but then again it might all get delayed further.”
With transitional arrangements now all but inevitable in respect of the UK’s departure from the EU, Mark Berrisford-Smith said the first EU-exit staging post set for nine months time, won’t be that significant for businesses.
“The real impact will be felt from 2021, and even then how that impact is felt will vary enormously from company to company.”
The economist added that for many companies the most profound issue will be accessing European talent, which is likely to get “quite a lot harder.”