Fret not – we have solid domestic demand in the UK

 

I attended Ernst & Young ITEM Club’s Autumn Forecast recently, and their Chief Economic Adviser, Peter Spencer was quick to let us know that the markets are “very worried” about the world economy, but also offered us comfort in the form of solid domestic demand in the UK.

 

Here are the three things I took away from the briefing:

 

Weak export demand

The weakness of export demand and oil prices has meant that there has been a lack of growth in the manufacturing sector. Of course this is partially to do with economic slowdown in China. China’s imports have fallen 14.3% over the last year. Chinese markets appear to be shaky at best, with the Shanghai and Shenzhen indices experiencing a 40% drop in value, and the markets have lost faith in the authorities’ ability to rebalance their economy. However, it was highlighted that the China’s bearing on UK exports has been relatively small. Only 3.5% of all UK exports went to China in 2014, while China’s share in UK export growth was 8%. The commodity prices continue to decline, but this reflects increases in supply as much as weak demand. The service sector, however, continues to perform strongly, carrying UK growth.

 

Strong labour markets, weak inflation

The overriding theme was that of a strong labour market, as demand for labour is rising faster than supply. This combined with the introduction of the living wage in April 2016, points toward strong wage inflation. Already in the year up to Q2, real incomes increased by 3.7%. Combining this with the weak price inflation rate (0.1%) we are currently seeing, Spencer went on to link this to forecast strong consumption levels, and benefits to consumer-facing firms. However, one has to beware the effects a rise in wages could have on the level of employment. There is a clear risk that the business community may not take too kindly to a spike in their wage bill, and may opt to reduce their workforce and/or scale back investment in order to stay profitable.

 

Availability of finance for SMEs

Spencer briefly spoke about the availability of finance for SMEs. The message was that the supply of credit had improved in general, from tight credit availability in 2013 to a relatively looser stance in 2015. He attributed that to dissipation in downside risk over that period. However, one could argue that supply has increased as a function of the growth of the alternative finance sector.  Recent research by Funding Options (a GLI investee company) showed that 46% of current SME lending is alternative, i.e. not a bank loan or overdraft.

 

Conclusion

Aside from the export markets, it appears to be a moderately bright UK forecast: GDP growth rates are predicted to be a healthy 2-3% through to 2018; CPI inflation is predicted to move within the inflation target of 2%+/-1 between by 2018; while the current account deficit also is predicted to fall to 3% of GDP by 2018, down from 5% in 2014.

 

Yet, this must be taken with a grain of salt. Spencer himself said that these expectations don’t take into account the possibility of any major shocks, which, given the volatility of world markets, can’t be guaranteed. When it’s not China’s markets erupting, it’s a Greek debt flood. 

 

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Dr Louise Beaumont is Head of Public Affairs and Marketing at , which is a leading investor in SME alternative finance.

Louise has over twenty years experience in growing companies - from initial spark, to operationalisation, results delivered, and value created. Having previously worked for organisations such as Siemens, Hewlett Packard, Microsoft, and Capgemini, Louise has focused on the UK’s fast growing alternative finance sector since 2010, including co-founding one of GLI’s investees. Louise has advised key UK government departments and units on FinTech and AltFin including; HM Treasury, British Business Bank, Government Office for Science, Cabinet Office, UK Trade & Industry, Department for Business, Innovation & Skills, and Number 10 Downing Street's Policy Unit.