But reports of the death of the British economy, lazily blamed on Brexit, may well prove to be greatly exaggerated, writes Bill Jamieson
There was a time, not all that long ago, when central bankers and finance ministers went away in August. Even the Bank of England’s monetary policy committee skipped its regular monthly meeting, confident that nothing much happens in the month that couldn’t wait.
But this August will see much happening. Today the Bank is set to announce a historic new low for UK interest rates. A cut from 0.5 per cent to 0.25 per cent looks likely.
Such a level would once have been regarded as indicative of war, a severe depression or some other dire national crisis. But here we are, eight years on from the global meltdown that sparked emergency “short-term” measures to stave off catastrophe and the cost of money is still being driven down.
According to financial data concern Markit, this week the UK economy is contracting at its fastest rate since the financial crisis. Its purchasing managers’ index shows activity in the dominant service sector has suffered its sharpest fall in seven years.
The sector accounts for nearly 80 per cent of UK economic output. And this comes hard on the heels of falls in both construction and manufacturing in July.
Chris Williamson, Markit’s chief economist, says “the unprecedented month-on-month drop in the all-sector index has undoubtedly increased the chances of the UK sliding into at least a mild recession”.
Separately this week, the National Institute of Economic and Social Research warned that the UK has a 50/50 chance of falling into recession within the next 18 months following the Brexit vote. The country, it predicted, will go through a “marked economic slowdown” this year and next.
In Scotland, forecasters are if anything more pessimistic. In one of its gloomiest assessments for years, the Fraser of Allander Institute has revised down its growth estimates to just 0.9 per cent this year (down from 1.2 per cent previously) and to 0.5 per cent in 2017 (down from 1.9 per cent). Equivalent NIESR forecasts for the UK predict growth of 1.7 per cent this year and one per cent next. Unemployment in Scotland is predicted to rise to seven per cent next year and “a short ‘technical recession’ – two consecutive quarters of falling output – is highly possible”.
The cause most cited is the UK referendum vote to leave the EU. Indeed, Brexit has fast become the “excuse du jour” for all our ills. Declared Simon Kirby of the NIESR: “This is the short-term economic consequence of the vote to leave the EU.”
And the Financial Times is in no doubt: the purchasing managers’ survey, it declared, “is the most significant evidence yet of damage to the economy from the June referendum result”.
But in truth, while Brexit has undoubtedly sparked uncertainty across the business world, the forces that have brought us to this state are more widespread and complex – even assuming hard and fast conclusions can be drawn at this stage from such volatile and at times contradictory business surveys.
For example, the Markit survey reports that manufacturing employment has been falling for seven months – well before the referendum battle got under way. And the CBI reports that its latest quarterly survey of the UK’s small and medium-sized manufacturers (SMEs) found that the 472 firms said that current orders were stable.
Commented Rain Newton-Smith, the CBI’s director for economics: “The UK’s SME manufacturers reported higher production, more staff hired and now expect to sell more of their world-class goods overseas over the next quarter, with a weaker sterling having a hand in this.”
The PMI data for construction also suggested demand patterns had been more resilient than expected. Construction firms appeared to be adopting a wait-and-see approach rather than curtailing or cancelling forthcoming projects during July.
And the latest UK-wide Bank of England agents’ reports found most firms were maintaining an attitude of “business as usual” for now. So far there is little evidence of companies moving operations out of the UK while consumer spending on services and non-durable goods appears to have held up and activity in the housing market more resilient than some of the BoE’s contacts had expected.
In Scotland, many have been quick to blame Brexit for the slump. The Fraser of Allander report views the slowdown “as a direct result of the EU referendum result, and a prolonged period of economic uncertainty and financial volatility”.
But the economy here was showing signs of slowdown throughout last year. And according to Scottish government statistics, it recorded zero growth the first three months of the year – an outcome that cannot be blamed on Brexit.
What then is to blame? A major reason for the growth collapse has been the sharp contraction in North Sea activity in the wake of the oil price slump. Across the specialist engineering and services supply sector, tens of thousands of jobs have been lost as oil companies cut back on exploration and development.
Of concern now is that the price of oil has fallen back once more. The spot price of Brent crude has sunk from a recent high of $51 a barrel to below $42 this week, reflecting supply gluts in North America and evidence of weak global demand. This is part of a continuing weakness in world commodity prices, fuelling fears that the global economy may be set for a further slowdown.
Another factor has been the fall back in construction activity from recent peaks as big infrastructure projects such as the Forth crossing have neared completion.
Meanwhile, more hopeful pointers are being brushed aside in this “me too” groupthink rush to blame Brexit for everything.
For example, counter to the widespread fear that inward investment would collapse, pharmaceutical giant GSK has announced £275 million of new investment in the UK while AstraZeneca is spending £330m, pointing out that it’s “hard to find a better place in the world” to carry out scientific research – both these despite warnings in the referendum run-up that the UK would be an investment loser on a Leave vote. Softbank of Japan has put in a massive £24.3 billion bid for tech firm Arm Holdings.
Meanwhile, 27 countries have already signalled their intention to sign trade deals with the UK, including India, China, Japan and Brazil. The 27 have a combined total GDP of almost $50 trillion dollars – more than two thirds of global GDP. In comparison, the EU’s GDP of $16 trillion equates to just 22 per cent.
Still to come is the “reset” of economic policy in the Autumn Statement. And arguably most overlooked of all has been the response of the entrepreneur and thousands of businesses big and small in Scotland and across the UK who simply want to get on, do the best they can – and make the best use of opportunity.
It has saved us in the past – and will do so again in the period ahead.