UK business optimism rises but stagnant wages could limit growth
Business optimism is running relatively high, finds a new report poll-of-polls of UK business reports; production sectors are particularly optimistic on the back of a low pound. Unemployment, meanwhile, has hit the lowest levels since 1975 at 4.4%, but real wages are projected to decline by 0.5% for the year – suggesting that this optimism may be short-lived, as decreased spending power impacts on consumer markets.
BDO’s latest poll-of-polls, titled 'BDO's Monthly Trend Indices', is a regular collation of all the UK’s main business surveys. The study, which looks at four key business trends: output, optimism, inflation and employment, studies the most recent figures available, and gives a general indication of business sentiment for the period.
The output index has remained almost unchanged since July, coming in at 95.1. Having recovered from a brief dip in output in June, this still represents near stagnancy for the index (positive growth >95). Following a previous protracted period of decline – which began at the end of 2015 when the rating stood at almost 105 points – there are still causes for concern despite increased stability. While a 0.2 point increase in services occurred, representing the majority of output, manufacturing, which accounts for around a fifth of total UK output, fell by 0.7 points to 97.9 in the period. The sector has been hit by a continuing period of uncertainty thanks to Brexit negotiations, which could impact the ease of imports and exports, as well as access to skilled labour for manufacturers.
GDP growth, meanwhile, stood at around 0.3% for the Q2 period, led by services which increased by 0.5% between Q1 and Q2. Production, however, saw declines of 0.3%. Researchers noted that, looking ahead, economic growth from spending is also likely to take a hit as consumers tighten their belts in the face of wages which are stagnating in real terms – which would also have a knock-on impact on manufacturing, and various other aspects of the supply chain.
Conflictingly though, BDO’s research shows that the manufacturing sector is actually optimistic despite an uncertain outlook. Investors in manufacturing have benefitted in the short-term from a relatively low pound, with 14% of firms reporting a rise in output in the past three months. The high level of confidence may reflect continued expectation of competitiveness going into Q3, as the pound remains relatively low. However, while negotiations between Brussels and the UK are on-going, the low pound is still supplemented by ready access to the EU in terms of tariff-free trade and free movement for employees. Were these factors to seem increasingly likely to change for manufacturers post-Brexit, this might impact on the confidence of manufacturers in BDO’s future surveys.
Despite declines in output, broader business optimism, reflecting order book development, has remained relatively positive following a large boost in at the end of 2016. Optimism has continued to run at around a rating of 103, as seen in the previous surveys, and has now trended up by 0.2 points to 103.2. Despite service optimism remaining somewhat subdued at 99.5, manufacturing optimism actually hit the highest levels seen in the report since the firm began to track optimism, up 1.2 points to 122.6.
The research notes that the inflation index has remained relatively stable at 104, an 0.8 point decrease on July – with headline inflation then running at 2.6%. The index remains above the long-term trend, reflecting the increased cost of goods and utilities, clothes, gas & electricity, and food & non-alcoholic beverages, although the price of fuel continued to decline.
The increase in inflation has bitten into real wage growth, which is found to have fallen by 0.5% in the year so far. Given the already squeezed finances of much of the UK’s working population, this has seen a decrease in retail spending for non-essential purchases, while budget stores like Aldi and Lidl have seen continued boosts to their sales figures.
The employment index is continuing to see increases as unemployment levels fall further to 4.4% of the UK’s working age population actively looking for work. The figure is the lowest since 1975, although the increase in employment has yet to translate into higher wages, even while demand for workers saw a near-record 768,000 vacancies advertised for May to July.
According to the study the relatively low wage increase so far this year, 2.1%, is reflective of ‘weak productivity growth, driven in part by economic uncertainty’. However, it may also be substantially linked to the growing ‘gig economy’ of the UK, whereby employers fill roles with ‘self-employed’ or ‘freelance’ staff in order to circumvent long-term commitments to higher wages and improved conditions – cutting costs, but at the same time limiting the spending power of a large portion of the working population – which, in the long term, could severely limit the growth potential of an economy based on consumption.
