UK Business Confidence Lowest in 15 Months

Business optimism has hit its lowest level since May 2017, when Theresa May announced a snap general election, according to new research.

Britain’s economy is set for modest growth providing a positive Brexit deal can be reached with the EU, according to KPMG’s quarterly Economic Outlook Report, Insider reported.

It predicts that UK GDP will grow by 1.3% in 2018 and 1.4% in 2019 which will mark the lowest rate of growth since 2008 and 2009.

The decline comes as key questions on the UK’s trading relationship with the EU after Brexit remain unanswered and the government ramps up preparations for no deal.

The international economic outlook has also soured, with weak wage growth threatening to undermine demand in some of Britain’s most important export markets.

BDO’s Optimism Index, which shows how businesses expect output to develop in the next three to six months, declined by 0.43 points in August to stand at 101.93. However, output increased marginally from July’s eight-year low.

Optimism in the UK’s service sector, which accounts for approximately 80% of GDP, fell to its lowest level since March 2017.

Increased pessimism has emerged a month after the service sector contracted for the first time in eight years, with output plummeting to 94.73 in July, according to BDO’s index, which combines indicators from a number of closely watched surveys.

Output rebounded slightly in August to 97.17, but remains 3.12 points beneath the figure for this time last year.

Optimism in manufacturing has fared better, rising from 100.16 in July to 102.06 in August. Any figure above 100 indicates growth.

  Lack of Progress

Peter Hemington, a partner at BDO, said lack of progress on a trade deal with the EU was now testing companies’ resilience.

“With the services sector accounting for more than 80% of UK GDP, the government must do more to reassure businesses that it will protect Britain’s 26 million services sector workers as Brexit negotiations take place, particularly considering Britain has the highest share of services exports than any leading economy.”

Last week it emerged that taxpayers would foot the bill for stockpiling of drugs to prepare for crashing out of the EU in March with no trade deal.

  Poor Productivity

But it is not just Brexit that is inhibiting growth, the KPMG report finds, poor productivity continues to be a drag and businesses are finding it increasingly difficult to recruit because of dwindling spare capacity.

Manufacturing is still seeing low export levels despite the weakness of the pound and retailers in particular are facing a challenging environment.

In addition, despite high employment levels, the report predicts workers can expect pay growth of around 3%.

Catherine Burnett, Scottish regional chair of KPMG, said: “Brexit will have a lasting effect on Britain, but economically it isn’t the only game in town.

“Echoing the sentiment of the Scottish government’s latest Program for Government, our own discussions with clients continue to raise issues such as improving productivity, reducing regional economic disparity, and ensuring workers have the skills to meet employers’ needs.

“Bringing productivity growth back to pre-2008 levels alone could see the British economy grow by more than 2%. If negotiations between the EU and Britain result in a relatively friction-free agreement, then growth is likely to remain around 1.4% in the medium term as a result of relatively weak productivity.

Retail analysts at the marketing consultancy Springboard said the decline was even sharper than the 0.8% drop recorded in July and showed that the rising cost of the weekly supermarket shop was leaving consumers with little cash left to buy other items.

  Interest Rate

“If we see a disorderly Brexit, growth will obviously slow more dramatically. If negotiations end well, the Monetary Policy Committee is likely to raise interest rates to 1% at the tail end of 2019. If no deal is reached, the MPC will need to use interest rates to soften the economic impact.”

Uncertainty and risks around Brexit are likely to make the MPC cautious during the critical months ahead. KPMG predicts that rates will stay on hold until November 2019, with another 0.25 percentage point rise scheduled if Brexit negotiations proceed smoothly.

Interest rates are likely to be cut to at least 0.25% if negotiations are not successful, with additional measures to be announced by the Bank of England to ease any significant pressure on the banking sector.