THE past year or so was one of upheaval and uncertainty, with the triggering of Article 50 beginning the process of leaving the EU, the election of Donald Trump, stock markets continuing to boom beyond expectation and the explosion of cyber currencies such as bitcoin.
So what can we expect in 2018?
Productivity levels
UK productivity levels are finally showing some signs of growth, following long periods of stagnation or worse. Since 2010, UK productivity levels have trailed the majority of G7 countries, with growth averaging the second slowest of the group of countries. But the latest figures from the Office of National Statistics (ONS) show productivity grew by 0.9 per cent in the third quarter of 2017, the biggest increase seen for more than six years.
The increase is good news for the UK economy, as it helps to push up wages and also to strengthen sterling, giving firms who buy goods or services overseas greater purchasing power.
Yet there are mixed views over whether UK productivity levels will continue to improve over the coming months. With UK unemployment at a 42-year low of 4.3 per cent, according to the latest ONS figures published in December 2017, some experts believe that companies will look to invest in new technology and machinery in order to boost productivity. Meanwhile, others feel that uncertainty around Brexit will restrain firms from investment and act as a downwards brake on productivity.
One thing seems certain, for UK productivity levels to continue to improve there will be need to be both public and private investment into areas such as housing, transport and infrastructure in the near future.
Interest rates
Following an increase in the Bank of England (BoE) base rate from 0.25 per cent to 0.5 per cent in November of last year – the first rise for more than a decade – the BoE made it clear that further increases were likely in 2018. However, the decision whether or not to raise rates is also dependent on economic factors such as inflation and wage growth.
Wage growth will push up inflation and make an increase in interest rates more likely. Yet currently wage growth is running at 2.3 per cent – significantly below inflation, which leapt to a close to six-year high of 3.1 per cent in November, fuelled by the rising cost of recreational goods such as computer games. The price of chocolate and oil prices also rose. Yet most economists believe that prices for consumers have now peaked.
As things stand, it is widely expected that the BoE will put up the base rate from 0.5 per cent to 0.75 per cent at some point this year, with the continued uncertainty around Brexit preventing big increases. Fewer economists predict we could see two increases during 2018, taking the base rate up to one per cent.
In its December Monetary Policy Committee report, the MPC (which voted unanimously to keep rates at 0.5 per cent) stated that ‘the committee remains of the view that, were the economy to follow the path expected in the November Inflation Report, further modest increases would be warranted over the next few years, in order to return inflation sustainably to the target (of two per cent). Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent’.
Economic growth
What can we expect to see in terms of economic growth? In November, the Office for Budget Responsibility forecast the UK economy would grow by 1.4 per cent in 2018. This is echoed by predictions from accounting giants PwC, who have predicted UK growth of just 1.4 per cent in 2018, compared to forecasts of more than two per cent for economic growth in the eurozone this year. The International Monetary Fund (IMF), meanwhile, in December downgraded their forecast for UK economic growth from 1.7 per cent to 1.5 per cent in 2018.
There is no doubt that uncertainty around Brexit has affected expectations for the UK in 2018. However, if we were to secure some significant new trading agreements with the EU, this may soon change.
And, to end on a somewhat positive note, the latest Business Trends Report from tax and accounting giant BDO shows UK firms are feeling optimistic about 2018, following the perceived progress made in Brexit negotiations. The report collates the results from all of the main UK business surveys, so is seen as a reliable indicator of attitudes among companies. Here’s to a successful 2018!
For more information, contact Brian Lehane at Handelsbanken Northampton on 01604 638489
Nothing herein constitutes advice, and professional advice should be sought before taking any course of action based upon the content of this publication. Handelsbanken is not liable for any losses that may arise from any person acting upon the information supplied. Handelsbanken considers that the sources and methods used in producing any analyses or forecasts contained herein are reliable, however Handelsbanken does not accept any responsibility for any shortcomings in the source material nor for the accuracy or completeness of forecasts or analyses.
