Eyes on the prize in Japan
OPTIMISM, unity and getting into the best shape possible for the awesome challenge ahead: sounds like Boris Johnson’s mantra for a possible No Deal Brexit. Staying positive is great - as long as you can deliver in the end. Boris could learn a great deal from the tenacity, control and character shown by England cricket hero Ben Stokes in his last innings against Australia, possibly the most remarkable innings ever seen in Ashes test match history, even over-shadowing Ian Botham’s splendid performance at Edgbaston in 1981. Despite the huge negativity surrounding his pre-World Cup personal issues, Stokes let his bat show he could walk the walk. Eddie Jones’s Rugby World Cup campaign this autumn again underlines the many parallels between business and sport, more often than not in areas of leadership, preparedness, determination and matching the right skillset to a job. Several observers have said that Jones’s England team is in better form on the eve of a World Cup than any since 2003’s champions. Priced by bookies at 9/2, they are presently fancied to get to the final.
In 2003, England was feeling more optimistic generally: UK GDP growth was 3.3% that year, against a World Bank forecast of 1.4% for 2019. All the more reason for Boris to head to Japan on the weekend of November 1-2 if England reaches at least the Bronze final. A day earlier, he will have taken the UK - “do or die” - out of the EU. Japan is a significant market for the UK as it is among our largest trading partners outside the EU. Our recent trade surplus with Japan,exporting about £12.5bn in goods and services a year while importing about £11.5bn, means Boris faces an awesome challenge of his own in Tokyo to seal the kind of standalone deal that he believes will sustain the UK post-Brexit.
The High Street begs for mercy
Preservation is the name of the game for Britain’s stricken retailers, with growth a distant dream for most operators. August proved to be yet another very disappointing month for retail, with like-for-like sales down 0.5% and total sales flat-lining at zero. Stores once again blame economic uncertainty on lower spending, compounded by summer discounting and poor footfall. Beyond Debenhams’ well documented pre-pack administration, retail failures so far in 2019 have included LK Bennett, Pretty Green, Bathstore and Jack Wills, the latter rescued by thwarted Debenhams suitor Mike Ashley. Marks & Spencer, widely seen as a bellwether of the retail sector, has twice this year faced relegation from the FTSE100 index (it was an original constituent in 1984) after seeing its shares fall by two-thirds since 2015.
Front of mind, however, is the ongoing business rates crisis which could see retailers face an estimated £170m increase in rates bills in April 2020 if they are adjusted in line with the expected 2.1% September inflation rate. The total increase across all sectors could rise by more than £650m. More than 50 High Street businesses have urged new Chancellor Sajid Javid to freeze the onerous multiplier for the first time since its introduction in 1990. Separately, supermarket giant Tesco has been lobbying support for a proposed online sales tax to balance the playing field between physical and digital operators. The recent boost to £1bn of the Government’s ‘High Street Fund’ to revitalise town centres is a laudable gesture, but the rating problem clearly needs a structural solution.
House prices held up by bricks or straw?
Brexit uncertainty and lower economic confidence may have impacted most sectors since the immediate aftermath of the June 2016 referendum, but the residential housing market has, all things considered, been relatively resilient: prices across the board have risen by more than 8% in those 38 months, albeit at a monthly rate slowing from 8% to 0.9%. Absolute demand outstripping the total housing stock has helped, but the prospect of No Deal is widely expected to nudge house price growth into negative territory by the end of the year.
A consensus of analysts says prices could fall by between 5% and 7% in 2020, with London unsurprisingly the worst hit because of its greater exposure to the EU. There is no great science to modelling these falls, apart from referencing previous housing slumps during economic fragility. The government’s promise of delivering 300,000 new homes by the mid-2020s is also likely to be delayed by slower new building as contractors remain wary and homeowners further up buying chains hold off moving until there is further clarity. The same observers see little respite from a last-minute deal with the EU, since wider problems in the global economy, as well as the longer term prospect of higher UK interest rates, will sustain pressure on house prices. Expect even the largest UK increases in that scenario not to exceed 3%.
Economic Outlook
Is the UK already in recession? We won’t know until Q3 GDP figures to September are made official in November. The first of possibly two consecutive shrinking quarters to make recession a reality saw the economy contract by 0.2% in the three months to June. The Q3 story so far is far from encouraging: the last quarter’s drop was down to the largest reversal in UK manufacturing activity since the financial crisis; the purchasing managers’ index (PMI) produced by IHS Markit / CIPS fell to 47.4 in August, down from 48 in July. A figure below 50 indicates the sector is contracting. There had been an expectation that factories which had closed over the initial Brexit deadline period would reopen with orders to boost the PMI, but the data suggest otherwise. There are two immediate considerations. Firstly, this is not a UK phenomenon: manufacturing PM is even weaker in the Eurozone, not least in Germany. Secondly, while manufacturing is a key indicator, it alone cannot push the UK into recession, since the service sector accounts for 80% of GDP.
In any event, the Bank of England has cut its forecasts for UK growth over the next two years. Leaving interest rates unchanged at 0.75% against a backdrop of weaker global growth and ongoing trade tensions between the US and China, the BoE expects GDP to nudge up by 1.3% overall in 2019, down from a previous projection of 1.5% in May. For 2020, it has cut its growth outlook from 1.6% to 1.3%. So no talk of a recession there, but remember that the BoE’s forecasts assume that the UK leaves the EU with a Brexit deal, while merely suggesting growth could be “much slower” in the event of No Deal. It sees a one-in-three chance of UK GDP shrinking at the beginning of next year - but markets and bookies alike believe the chance of No Deal is way higher than one-in-three.
The jobs market, recently strong, appears to have plateaued, with unemployment ticking up from 3.8% to 3.9% in Q2 2019 - the first rise in a year. Wage growth appears to continue apace, owing to skill shortages in many sectors of the economy, but wage growth may prove to be illusory for households if it forces inflation - and therefore interest rates - higher. The BoE has made clear that protracted weakness in sterling in the event of No Deal make interest rate cuts extremely unlikely. It has also flagged that it has few, if any, tools available to stimulate the economy if growth slows dramatically in that eventuality.
Small and Medium Enterprises (SMEs) present a notable area of concern in the next few months. Leading banks have warned the government that their SME customers are inadequately prepared for No Deal, not least regarding possible supply chain issues, obtaining licences and regulatory considerations. Since the UK’s five million SMEs account for 60% of all private sector employment, the Department of Business’s recent £10m grant for trade associations to help such enterprises ready themselves, although most welcome, may not be enough to keep them on track.