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FutureStarrThe UK Economy is in "a Lot Better Shape" Than Bleak Figures Suggest Fund Manager Andy Brough
Andy Brough, a veteran Schroders fund manager, believes the UK economy is "much healthier" than anticipated and could avoid recession. Here's why.
The country's economy is one of the strongest in the world, boasting annual average GDP levels of more than 1 trillion British pounds (USD) and ranking fifth behind the US, China, Japan and Germany.
Services have long been an integral part of the UK economy and their growth has been particularly strong in recent years. Over 170 years, services' share of GDP has surged from 46% to around 80% - making them by far the biggest source of employment in the UK.
In November 2022, services output rose 0.1% from October and the Office for National Statistics (ONS) believes a technical recession has been avoided. Two consecutive quarters of negative growth would have constituted Europe's definition of a recession at this point.
However, the ONS cautioned that this was a month-on-month measure and thus should be treated with caution. Furthermore, they noted that these figures could be revised downwards in a few months' time.
The growth in services was driven by administrative and support services, employment services and consumer-facing activities. This included a 2.2% surge in food and beverage services as the soccer World Cup got underway.
Despite these improvements, services remain below pre-pandemic levels due to restrictions placed on trading during Covid-19 virus and businesses adjusting to new trading conditions.
Overall, services have been a cornerstone of the UK economy's recovery and their continued expansion is likely to determine if recession will avoid occurring during the first half of this year. While recent figures suggest that the UK is doing much better than some might believe from some gloomy indicators, further growth is necessary in order to meet the demands of businesses and consumers alike - this requires higher investments such as infrastructure projects and an enhanced skilled labor force.
Manufacturing is a vital sector of the UK economy. It encompasses firms that manufacture goods for sale, such as motor vehicles, chemicals, pharmaceuticals and machinery.
Productivity in the UK has remained relatively stagnant over the last decade, and many manufacturers are facing numerous difficulties. These include a shortage of skills within their sector, the need to adopt new technologies rapidly, and issues within the education system.
Furthermore, the EU transition period has created significant uncertainty for many in the manufacturing industry. Six months into it, it remains uncertain how data protection will work, if businesses can employ EU staff temporarily and whether state support for manufacturers will exist.
Another major challenge faced by UK manufacturers is that many depend on just-in-time deliveries of intermediate goods like raw materials, fuel and chemicals. If these supplies are delayed, it could drastically impact a company's production process and output.
Automotive and chemical firms face an especially pressing situation, as they must deliver products to customers within hours. To stay afloat, these industries need to be highly responsive and flexible when it comes to supply chain planning - something which cannot be taken for granted.
Thankfully, the British government has taken a number of initiatives to help alleviate this crisis. It has reinstated measures designed to support business during Covid-19 lockdown and is also exploring ways to expand tax breaks for companies investing in research & development (R&D).
Retail sales in the UK have increased by 6.9%, data shows. However, this rise is primarily due to higher prices rather than increased consumer spending. The UK's inflation rate is more than double that of 39 countries within OECD boundaries, meaning households are paying more for their goods a year ago than they did one year prior.
Ecommerce's share of the total retail market has seen a dramatic growth, reaching almost 19% in April 2020. However, this pace is now slowing and is predicted to decrease once again by the end of 2021.
Despite the growth in online shopping, physical retail stores remain popular. This is because consumers still appreciate having access to multiple locations to browse and purchase goods.
Retailers are bracing themselves for a winter of hardship, with consumer spending set to take a hit from inflation in 2023. The CBI's latest monthly Distributive Trades Survey indicates firms expect little festive cheer this year to January.
According to the British Retail Consortium and accountancy firm KPMG, higher prices are the main cause of retail sales growth rather than consumers purchasing more. This has been due to rising living expenses over the last several years.
In December, sales were spurred on by people investing in energy-saving products and warm clothing as they scrambled to pay their mounting bills. However, this was partially offset by people buying less, leading to an overall decline in overall sales. Nonetheless, this marked a "healthy" improvement compared to last year's rather dismal December.
Construction output was slightly higher in August due to an uptick in new work. This was encouraging news for the industry, indicating developers still have faith in their projects.
However, there are some concerns about the UK economy. It is currently in a recession which will reduce demand for new builds. Furthermore, rising costs of products and materials are expected to have an adverse effect on construction activity.
However, the construction sector offers numerous growth prospects on the international market. It boasts world-class expertise and is a leading exporter of construction products, contracting services, and professional services.
Therefore, the UK government has been actively encouraging British companies to expand. This includes reforming the planning system and guaranteeing funding for critical infrastructure projects.
The government is devising a strategy to make the UK an international leader in infrastructure and construction. To this end, measures have been put in place to encourage innovation and provide easier access to capital.
Therefore, the UK will have more opportunities in the future to compete against other countries and export its goods and services.
To guarantee the UK's ability to compete, the construction industry must adopt sustainable solutions. This entails incorporating green building practices and increasing energy efficiency.
This will improve the lifetime performance of buildings and establish the country as a leader on the international market. Furthermore, it encourages innovation within the construction industry to transition away from project-based transactional relationships towards one that promotes sustainable enterprises.
Financial services are an integral component of the UK economy, contributing PS216 billion annually and employing over 2.3 million people. Furthermore, this industry generates substantial tax income for the government - PS75 billion in 2019/20 alone.
The UK financial services sector is a major exporter, producing an annual trade surplus of PS45 billion in 2021 (see Figure 4). When including the City of London into this equation, this surplus doubles.
It plays an integral role in maintaining the UK economy's global competitiveness and represents the interests of its citizens. As such, it offers numerous jobs and skillsets, providing professional services such as investment banking, asset management and corporate finance.
During the economic crisis, the government implemented a new regime to guarantee personal accountability for risk-taking staff in banks. It was meant to reduce losses by giving fines and bans more power; however, critics have noted it makes it harder for top talent to find employment.
Many firms in the City are now at a disadvantage and will find it challenging to recruit an extensive pool of financial services professionals if London no longer serves as a passporting zone for firms outside Europe.
The Chancellor has unveiled plans to harness the advantages of Brexit by repealing and replacing hundreds of pages of burdensome EU retained laws governing financial services with a smarter regulatory framework that is agile, less costly and more responsive to emerging trends. These reforms aim to fuel growth and usher in an era where UK financial services sector is open, sustainable and technologically advanced - one which is globally competitive while serving communities and citizens equally.