2018: lifting clouds?

Business Insights

Phillip Wood, Midlands Regional Head, UBS Wealth Management.

Looking back on 2017, we saw continued buoyancy from businesses in the Midlands, and a better performance than expected from the UK economy as a whole. What do we see on the horizon for 2018?

Heading into 2017, expectations for the year were gloomy. The economy has indeed slowed down from the positive pace at which it ended the previous year, but the eventual outcome looks to have been better than most expected.

Better than expected performance in 2017 has proved enough for the Bank of England to reverse their emergency base rate cut that followed the EU referendum. Healthier momentum coming into to the year is one factor that has encouraged us at UBS Wealth Management to upgrade our forecast for UK economic growth in 2018 from 0.7% to 1.1%,

We expect this level of growth to be maintained as the UK leaves the EU in 2019. The recent agreement reached on the UK’s "divorce deal" with the EU provided an optimistic end to 2017. As talks progress on the transition period to smooth the way to post-Brexit relations, a cliff-edge moment for the economy has likely been avoided, for the foreseeable future at least. This should partially lift the clouds of uncertainty hanging over the UK economy, potentially a boost to business confidence, lessening the risk of a significant slowdown in investment in the months ahead.

The global backdrop is also currently supportive of UK growth. As as is a relatively small, open economy, the UK is well positioned to benefit from what is likely to be another year of broad based economic growth. The global economy expanded at a healthy pace in 2017, and we expect this to continue next year with growth of 3.9%. Together with the weak pound, this backdrop should boost the contribution of net exports to GDP as the UK adjusts to a new trading relationship with the EU and the rest of the world.

So how does this economic backdrop affect households? With inflation likely approaching its peak, it looks as though the squeeze on consumers from rising prices will ease in the early months of the New Year. We’re also seeing signs of life in terms of wage growth: if current levels of growth in the private sector are sustained, and there is an easing of the public sector pay cap, households should start to feel the benefit.

And what does this mean for our region?

In light of this backdrop, the general mood among the businesses in the Midlands is one of optimism. There is confidence in the regional economy, with Birmingham the most rapidly-improving city in the UK according to a recent study by PwC and Demos.

Brexit is often depicted as a black cloud hanging over UK businesses, but our clients have become reconciled to the prospect of the UK leaving the EU. Of course, uncertainty persists, but businesses are used to dealing with ambiguity, and are approaching the situation with pragmatism. The recent agreement on phase one of the Brexit talks should have gone some way to address concerns.

While Brexit is the headline-stealer, perhaps a more pressing issue which persists against this backdrop is the productivity puzzle. The UK economy is extremely unbalanced, with the skew of activity and wealth creation towards London and the South-East. The Government’s recent Industrial Strategy highlights the recognition that we need to do more to boost productivity across the whole of the UK.

To solve this imbalance, investment in infrastructure should be an immediate priority. Upgrading transport links across the whole country will improve inter-regional connectivity, trade and bring more of the workforce within reach of relevant jobs. The latest devolution deal, which secured £250m of funding for the West Midlands transport infrastructure, is a step in the right direction.

We also need greater investment in digital infrastructure. According to the British Chambers of Commerce, some 70% of UK businesses experience problems with mobile coverage in their local area, which is hampering growth opportunities and causing unnecessary delays.

Companies need to play a role by ensuring greater focus is placed on upskilling their workforces through quality training. However, a strong approach from the Government which encompasses targeted investment at a regional level is necessary to increase productivity across the UK.

Blue skies ahead

Our clients are hopeful for blue skies on the horizon in 2018. Political uncertainty will no doubt continue to be a prominent feature of discussion. However, in our view, the UK economic outlook will not be as bleak as some would have predicted this time a year ago. Efforts to boost productivity on a regional basis would likely drive further success.