2020: The Economic Year ahead

“UK PLC” reopens its doors today after a well-earned festive break and 2020 promises to be no less interesting than 2019.

Will Boris Johnson’s spectacular election victory deliver a major boost to the economy?

The Prime Minister has stated that the UK is on the verge of a "new chapter" in its history. With the prospect of a new government with a sizeable majority injecting confidence into the economy, and the promise that the UK might finally leave the EU, there would appear plenty for businesses to be optimistic about for 2020.

Nevertheless, clouds continue to loom over our political and economic skies.

This will therefore be a crucial year for the UK.

The outcome of the key issues below could well determine whether the “new chapter” is cheerier for the UK than the last one.

Brexit

The United Kingdom will, it has been promised, formally exit the European Union at the end of the month, but that deadline will only sound the starting gun for the next stage of the race: a formal free trade agreement, to be concluded before the end of the year.  

An inability to come to an understanding on crucial issues, such as tariff rates between Britain and the EU, or regulatory standards between the two, will lead to further economic uncertainty at the end of the year. A failure to reach an agreement, in record time, will impact on investment, business and consumer confidence and growth.

Thrown into the mix is the fact that the United States and the UK aim to start negotiating their own free trade deal this year. The conflicting nature of US and EU demands will make it difficult for the UK government to navigate choppy diplomatic waters and close a meaningful deal with either side.

An end to economic stagnation?

A swiftly put-together Queen’s Speech has already promised extra government spending. Additionally, the unemployment rate is expected to remain close to its lowest level since the mid-1970s.

Nevertheless, any “Boris bounce” that the UK economy will receive is expected to dissolve in 2020 as uncertainties continue. A snapshot of the Financial Times annual survey of more than 85 of the country’s foremost economists revealed that experts expect little or no improvement in economic growth this year, as chronically weak productivity persists and Britain’s future trading relationship with the EU remains unknown.

Additionally, the British Chambers of Commerce (BCC) said its research suggested “protracted weakness” across the economy, affecting firms in manufacturing and services.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, stated that whilst the election did bring some clarity to the manufacturing sector, “ it still feels like a long road ahead for manufacturing to recover its losses from this year and there will still be some obstacles to overcome in 2020”.

Can the “Boris effect” move into the economic sphere and defy a largely gloomy outlook amongst experts for the coming year?

Business Investment

The British Chambers of Commerce reports a forecast decline of 1.5% in business investment in 2019. However, that decline should reduce to just 0.1% in 2020. “Certainty should breed confidence among businesses here and overseas to invest in the UK,” says Lee Wild, head of equity strategy at Interactive Investor.

Companies that have adopted a ‘wait-and-see’ approach may decide to increase investment after three years of waiting- but only if it appears that the Brexit deadlock is finally broken.

Business Rates Reforms

Small restaurants, pubs and cafés will see a decrease in their business rates bills under plans drawn up in the recent Queen’s Speech. All retail businesses with a rateable value of ￡51,000 or less will see their business rates discount rise from 33% to 50% in 2020. Independent pubs will also see their bills cut by a further ￡1,000.

Significantly, the government has also promised to conduct a wider review of the system, with a budget in March set to announce a whole rates regime. A Treasury select committee reported last month that the current situation showed a “broken system”.

There is no doubt that business is looking to the government to urgently reform the system. An unfair system places a greater cost on high street shops and sectors such as manufacturing than on online businesses, and reform is crucial to stimulate business growth.

UK Property Market

It is not difficult to theorise that the UK property market is fundamentally linked to the country’s business outlook.  Savills Estate Agents’ projection of UK house price growth of 4.0% in 2020 will come as welcome news to homeowners.

Commercial analysts are also hoping that a more certain economic environment will jumpstart the UK’s commercial property sector.  Jessica Berney, fund manager of the Schroder Real Estate Fund (SREF), expects the commercial real estate market in the UK to remain strong in 2020, stating that a “potential Brexit deal could trigger a new inflow of foreign capital, particularly into the London office market, where yields remain higher than Paris and Berlin”.

A Review of IR35

In April 2020, private sector contractors are due to join those in the public sector in having their contract status determined by the end user of their services. Some large companies, such as Barclays and GlaxoSmithKline, have already imposed a blanket ban on off-payroll workers.

In the run-up to the election, Chancellor Sajid Javid pledged a review of IR35 as part of the Conservative Party’s bid to support self-employed workers. The Chancellor said the party had promised a review of how the government could further help the self-employed, adding that “one thing in particular” he wanted to look at was the proposed changes to IR35.

Two Conservative MPs have already written to him, arguing that there is a real danger of losing business to overseas outsourcers at the expense of self-employed people in the UK.

2020 is therefore seen as a huge year for contractors and freelance workers, who remain unsure whether IR35 will be implemented as planned in April. The government has yet to determine whether any proposed review will result in the changes being placed on hold for the time being.

The continued demise of the High Street?

Last summer, the number of empty shops in town centres was at its highest for four years. It seems barely a month goes by without a high street retailer encountering serious difficulties. Last year saw much-loved baby goods retailer Mothercare entering into administration.

There are those who remain optimistic about the High Street’s future. The High Street is changing, but not dying, according to the founder of outdoor clothes chain Mountain Warehouse. Time will tell whether promised cuts of up to 50% in business rates will have a positive impact on the High Street.

Ministers have revealed the first 14 high streets to receive ￡1 billion government funding to help improve the UK’s retail sector. The High Streets Task Force is to give 14 town centres up to ￡25 million worth of training, face-to-face support and access to research to give small business owners an edge. The scheme was announced by the government in response to recommendations of an expert panel chaired by Sir John Timpson.

Global Challenges

Further afield, whatever the outcome of Brexit, the UK economy faces tougher global economic conditions that may well affect our businesses this year. The International Monetary Fund and the Organisation for Economic Co-operation and Development both predict a global economic slowdown in 2020, with the OECD forecasting the slowest growth since the 2007-08 financial crisis.

Trade conflict between the world’s two largest economies – China and the USA – is a growing issue and, closer to home, the European Central Bank had advised it is prepared for an economic downturn in the Eurozone.

Globally, debt – whether corporate, household or national – is at record-high levels.

Finally, we must not forget the good old-fashioned political risks, which threaten to escalate at any time, and can lead to an increase in prices for key staples such as food and oil. Ongoing tension between Iran and Saudi Arabia, Russia and the United States, North Korea’s nuclear programme and China’s reaction to matters in Hong Kong and Taiwan could easily impact on the UK’s economic position.

“When the world economy is sick, the UK becomes infected too,” warns Andersons partner Graham Redman.