The UK is in the grip of a crisis with a political vacuum and weakening economic data. But is it really as bad as the headlines suggest?
- The UK economy is starting to reflect Brexit-related problems and the consumer is vulnerable
- Manufacturing is providing a chink of light
- Sterling may yet prove an escape valve for the UK economy
The Brexit negotiations are flailing, the government is weak and the economy appears to be turning South. These problems have been reflected in a flagging currency and weakness in domestic stocks such as retailers and pub companies.
Some would argue that it really IS that bad. The UK consumer – around 60% of the UK economy – is losing momentum. Despite a recent blip in retail sales figures, the general trend is lower and this is likely to get worse as inflation squeezes real incomes. There are also longer-term concerns about the Brexit impact on employment. The weak government means that nothing much can get done, not just on Brexit, but on housing or energy or anything else.
“The current price of sterling appears to assume that the UK will be chunked out of the EU with no deal, with no transition agreement and with no other trade deals.”
But there are chinks of lights. Manufacturing data is improving, partly thanks to the weaker pound. While it is a smaller part of the UK economy, it can still help partially fill the void left by the consumer. Employment data is still relatively strong.
Many believe that sterling looks excessively weak. The UK is facing a lot of uncertainty, but a disastrous outcome is not guaranteed and yet this is what currency markets appear to be telling us. The current price of sterling appears to assume that the UK will be chunked out of the EU with no deal, with no transition agreement and with no other trade deals. Yet Chancellor Hammond discussing a transition period and about smoothing the path for businesses. This is more encouraging.
Other countries are not without their problems. The US, for example, is also facing considerable political instability and weakening economic figures. The Eurozone may be enjoying a purple patch, but Italian elections are looming and may disrupt its current equilibrium. It would be wise not to overplay the UK’s problems relative to the rest of the world.
Also, the UK’s problems are largely reflected in share prices. It doesn’t mean that they can’t get worse, but it does mean that the risk for investors is not as great. As always, discernment will be key. Some companies will suffer in this environment – from higher input costs, from Brexit uncertainty – but the right companies with the right business model can still thrive.