World Economy

UK Business Pessimism Rising

UK Business Pessimism Rising
UK Business Pessimism Rising
The survey of 750 business leaders found that after general economic conditions, uncertainty around trade with the European Union was the biggest concern

Business leaders’ confidence in the British economy has fallen to its lowest point this year reflecting the impact of uncertainty over Britain’s exit deal with the European Union, according to a survey published on Monday.

With less than eight months to go until Britain is due to leave the EU, the government is yet to agree the terms of its departure with Brussels and has stepped up planning for the possibility of failing to reach a formal agreement, Reuters reported.

The survey of 750 business leaders, carried out by the institute for directors employers group, found that after general economic conditions, uncertainty around trade with the European Union was the biggest concern.

Asked how optimistic they were about the wider economy over the next 12 months, more said they were pessimistic than optimistic, resulting in a net confidence level of -16%. That compared with -11% in June, and down from a positive rating of 3% in April. The IoD said 44% cited uncertainty over the trading status with the EU as having a negative impact on their organization.

“Despite cautious optimism emerging amongst the business community earlier in the year, any momentum appears to have dwindled,” Tej Parikh, senior economist at the institute of directors, said in a statement.

“We’re heading back to the levels of pessimism we saw before progress was made on phase one of Brexit talks.”

The survey, carried out July 11-26, found respondents were more positive about the prospects for their own organizations, with a net positive outlook of 37%, although this was also down from 46% in June.

Parikh said that as well as uncertainty over Brexit, larger businesses had been hit by other headwinds including oil price rises, while smaller firms were suffering from high costs, skills shortages and weak productivity.

“It’s unfortunate that the Brexit process has limited the bandwidth of government to meet equally pressing domestic economic challenges, that needs to change sooner rather than later,” he said.

  Poor Productivity

Ten years into Britain’s productivity crisis and the finger of blame is increasingly being pointed at the structure of the economy.

With living standards held back by slow growth in output for hours worked, some politicians are starting to say that capitalism is failing.

Jeremy Corbyn, leader of the Labor party, last month gave a speech in which he pledged that as prime minister he would introduce a “new economic approach” that would focus on manufacturing rather than the City of London and financial services. He vowed to “provide capital to the productive, real economy that secures good, skilled jobs”.

In her first Conservative party conference speech after becoming prime minister in 2016, Theresa May promised action after admitting that structural problems with the economy were “holding people back”. She promised to intervene in “dysfunctional” markets, such as energy, and the government is now in the process of placing a cap on consumers’ electricity and gas bills—if they are on standard variable tariffs.

Against this backdrop, economists have been trying to find a definitive link between aspects of modern British capitalism and UK productivity woes.

One key question is whether inadequate competition is contributing to Britain’s feeble growth in output per hour worked.

Since the mid-2000s, British industries have become more concentrated — with fewer companies enjoying larger market shares.

The top five companies in each of 600 sub-sectors secured 43% of available revenue in 2015-16, compared with 39% in 2003-04, according to a report published last month by the Resolution Foundation, a think-tank.

The report noted other research about the US, where industry concentration is more pronounced than in Britain, which found companies were enjoying higher profit margins owing to reduced competition.

However, industry concentration in Britain peaked in 2010-11, and sectors have become less concentrated for most of the period of low productivity growth.

  Conundrum Plaguing Economy

Unemployment rate in Britain fell to just 4% this week—it’s lowest level since comparable records began in the early 1970s—and some commentators took it as a sign Britain’s economy is performing solidly despite the uncertainty around Brexit, Business Insider reported.

The data, however, highlighted a conundrum that has been plaguing the British economy for several years: if unemployment is so low, why aren’t workers getting larger pay rises?

“The drop in unemployment was only one of an array of indicators which suggested that the labor market is becoming increasingly tight,” Andrew Goodwin, lead UK economist at Oxford Economics, wrote on Friday.

A fresh low in the ratio of unemployed people to jobs available is a key sign of this tightness, Goodwin said, as well as record low in the number of people who have changed employment status in the last three months. That presents a dilemma to employers—how do they attract people to fill vacant roles?

The two standard methods of doing so are to bring people who are inactive into the labor force and to increase the hours of those people already working for them.

“The data shows some evidence of firms pursuing both options. Flows from inactivity to employment have been much higher in recent years, even allowing for the possibility that some of these people may have been temporarily inactive because of universal credit delays,” Goodwin wrote.

“Meanwhile the ONS measure of underemployment fell again in Q2, reaching its lowest level since mid-2008,” he added.

Increasing the number of overall hours worked through these avenues would generally need employers to offer significantly higher wages, designed to tempt people to work more, or come out of inactivity.

Add new comment

Read our comment policy before posting your viewpoints