What’s the economic outlook? The views of a business leader informed by business leaders!

Here’s my latest thoughts based on our most recent monthly survey results as shown in the graph.

Summary

• Inflation down to 2.3% and GDP growth up to 0.6% (equates to 2.4% pa) BUT GDP, taking into account inflation and population growth, is not growing.
• Inflation is forecast to to fall to 1.6% this year but then increase again because of one off impact of reduced energy prices
• The Bank of England reports consumer confidence overall as okay because real incomes are up by 3%.
• But business confidence according to our survey is down over the last couple of months. That is consistent with conversations I was having before the election was announced. Business leaders have been finding the economy and especially the uncertainty, hard work.
• Note of course our survey was before the announcement of the General Election.? It will be interesting to see the results next time. I suspect optimism will increase.
• My belief is that SME businesses are smart and can cope, better or worse, however the economy is managed.? They can adapt to whatever rules exist as long as they understand them.? The problem we have faced for quite some time now is the continually changing framework.
• I am therefore optimistic that whatever actions the seemingly inevitable Labour government takes, and whatever opinion we as individuals have about their policies, a strong majority government will bring stability of direction.? That will in turn enable businesses to plan and invest and that will be good for the economy. So I’m positive over the 3-5 year horizon.

Background: Bank of England Interest rate decision

• At their last meeting the MPC decided not to reduce interest rates because
• The forecast is for inflation to increase after recent falls in energy prices drop out and oil prices could go up later in year
• Their focus is on keeping long term inflation rate at 2% sustainably.
• They are concerned about inflation returning and persisting over the medium term because (a) Services price inflation is currently at 6% and no sign of abating (b) Pay growth is currently 5.5% - 6% (c) The UK labour market - has loosened a little but is still tight. The bank is watching these very carefully!

AND whilst we clearly need to note what institutions such as the Bank of England are saying and doing, I STRONGLY RECOMMEND you DO NOT pay too much attention to their forecasts for reasons I explain here.

Other observations

• There are comments in some places about interest rates returning to normal.? But what is normal?? Normal probably isn’t the less than 10% we have recently experienced.? In 1970s and 1980s normal was about 10% and in 1990s and 2000s about 5%.
• The UK economy continues to grow just slowly. The normal for UK economic growth used to be growth of 4% based on inflation of 2% and productivity improvement of 2%. For much of the last ten years UK productivity growth has flatlined close to zero and as a result we have experienced growth of less than 2% with inflation of more than 2%.
• As commented above I believe we need policy consistency, that will create a stable environment and that in turn will encourage private and international investment in the UK economy and eventually productivity growth whatever the government does. And IF a new government does make wise investments that lead to productivity growth that will help too.