Investors and advisors pessimistic on economic outlook

With Brexit’s latest deadline swiftly approaching without any sign of a deal, optimism regarding the UK’s economic prospects is at a new low. According to a new survey of investors and business leaders, the majority feel negatively about Britain’s economic outlook in the next two years.

A recession is when the economy declines significantly for at least six months (commonly it is said to be when the GDP growth rate is negative for two consecutive quarters or more), leading to a drop in real GDP, income, employment, manufacturing, and retail sales. Following the last IHS Markit/CIPS purchasing managers' index reading, the economy recorded negative growth of 0.1% between April and June. Should that performance be confirmed by official statistics and the negative growth replicated in the current third quarter, the UK would already be in a technical recession ahead of its next Brexit deadline of October 31st.

As the country braces for a No Deal, which may well exacerbate the current situation, private equity investors and business management teams are understandably apprehensive about what the future holds for the UK’s markets. Negative sentiment towards the economic outlook for the UK over the next 18 to 24 months amongst the UK investment community has increased sharply from 49% in 2018 to 67% in 2019, according to the annual Investment 360 Index by management consulting firm CIL.

The consultancy’s study – which polled 276 management teams, private equity investors, debt providers and advisory professionals in the UK – saw 59% of respondents say they feel negatively about the economic outlook for the UK in the short-term. This represents a leap of almost 10% on last year, reflecting the worsening state of the UK’s economy in the last year. Only a total of 9% are in some way positive about the coming two years, meanwhile.

While some respondents cited being at the end of a long positive global economic cycle and being “due a correction” as the reason behind this fall in confidence, others were more focused on the UK’s geo-political situation. One said, “Brexit uncertainty is weighing on investment decision making.”

Indeed, amid the continued uncertainty surrounding Boris Johnson’s Brexit intentions, with the Government seemingly intent on forcing through a No Deal Brexit against the will of a prorogued Parliament, sentiment regarding the Government’s performances is hardly favourable, either. As the Prime Minister’s strategy seemingly pushes the country towards a hard exit from the EU, multiple studies have suggested this will have dire consequences for British business.

One disgruntled respondent said that “uncertainty on the decision making needs to end so we can deal with the next stage of Brexit,” while another contended that pragmatism has been “totally and utterly thrown out of the window.” As a result, a huge 68% of those polled by CIL said they felt the Government is not doing a good job.

This represents a drastic increase on last year’s figures, and while Theresa May’s beleaguered administration still saw around half of respondents say it was not doing a good job, the new leadership of the Conservative Party has seen confidence collapse even further. Just over a third gave mixed responses, meaning a tiny 5% answered positively about the performance of the UK’s Executive arm.

Until this situation changes, it seems that investors will be more reluctant to sink capital into UK projects than previously. When asked how they feel about the investment environment, four in ten respondents were still positive to some extent, and a similar number were neutral on the matter. However, a growing portion said they had reservations on the investment environment, with 18% saying they are negative, up from around 10% in 2018. At the same time, 3% now feel very negatively about the matter, with no respondents having said that in 2017 or 2018.

In the short-term, businesses seem to dread the short sharp shock that they believe lies in wait. It is not all bad news though, as many seem more optimistic about the bigger picture. To this end, one respondent explained, “Post-Brexit there will be a lot to sort out, but there is no reason to believe growth won’t return in the medium-long term.”

When asked how they feel about the economic outlook in the next 5-10 years, 48% said they are positive about what the future holds. An additional 8% were very positive, meaning a majority expect the UK economy will bounce back eventually, with companies ultimately able to take advantage of new opportunities created by the coming crisis.

Commenting on the findings, Giles Johnson, Managing Partner at CIL, said, “The uncertainty caused by Brexit is weighing heavily on investors in the short-term. There are a range of unknowns affecting the global economies, such as trade wars. However, thanks to sound monetary policy from the Bank of England and strong fundamentals, Brexit aside, the long-term outlook remains positive.”