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More thoughts on the economy

Let’s start with some positives.

As of 9th November 2018, we received the official figures for the third quarter’s gross domestic product which showed an encouraging 0.6% of growth in the economy. This is the fastest rate of growth since the first quarter of 2016.  Influencing factors included higher spending as a result of sunny weather and England’s impressive performance in the World Cup, as well as a surge in the construction sector.

Secondly, the Bank of England have been thinking that, provided a Brexit disaster is avoided, 2019 should look a little better than 2018.

And thirdly, the Office of Budget Responsibility expects better tax receipts and more people in work in the future. This allowed the Chancellor to spend more than expected in last month’s budget, including a boost to the NHS and the raising of personal allowances.

On the flipside, however, we face some economic challenges due to the US trade wars with Iran, the US bond yield curve and, of course, Brexit.

Last week, the US re-imposed what President Trump called the “strongest sanctions ever” on Iran in an attempt to force the country to renegotiate its nuclear programme and reform its political system. That said, most of Iran’s oil markets were exempted, but then oil prices are already at a relatively high level, and the US is already very reliant on Saudi Arabian oil.

Also in the US, there is, according to some, a disturbing US bonds yield curve. 

Keeping it simple, the yield curve is a line that plots the difference between short and long-term interest rates in the US.  It has been levelling-out, but many commentators are worried that it will invert as soon as next year.

Why does this matter? An inversion of the curve often signals an economic recession and is thus a sign that economic turmoil is around the corner.

One reason for this is banks.  Banks make money from borrowing at short-term rates and lend longer term at higher rates.  But, if the long-term rates are the same or lower, there is no benefit in lending.  The ability of private companies to borrow is therefore reduced.  The UK is dominated by private companies and this means they may be starved of access to debt.

The implications of this are that growth stalls.  Or if a company plans to sell its business, the availability of debt to buyers falls resulting in fewer sales of companies and perhaps at lower multiples.

With Brexit, we remain uncomfortably close to a ‘no deal’. Whilst there is talk of European leaders being required to keep a date free later this month and a deal being reached, we then enter a period of transition. Essentially, the can is kicked further down the road. Not good, as it is certainty that businesses need and an extended period of transition does not provide this.

The most recent purchasing managers’ survey published by Markit reported depressing news with a ‘sharp slowdown’ in manufacturing, and the weakest services since March this year, when the Beast from the East was causing a chill.

Markit’s chief economist went on to say, “While it is not surprising to see that Brexit uncertainties are increasingly undermining business activity, the survey responses also suggest that the economy is facing other headwinds, including a broader global slowdown, trade wars, heightened geopolitical uncertainty and tightening financial market conditions”.

The Institute of Chartered Accountants in England and Wales, of which I am a fellow, have also conducted a survey. That says that business confidence is at its lowest since the last recession.  Forty-two percent of businesses interviewed said that they were less confident in the economic prospects facing their organisation over the next 12 months. It reports that profit growth is down and investment is lower reflecting caution by businesses.

Returning to the first of my positive points, the third quarter did indeed show good growth, but the pattern was not even through the quarter: July was exceptional, but August and September were flat.

There is, of course, the possibility that last week’s electoral gains by the Democrats may help the Trump-led trade tensions, but don’t bank on it.

Reality is that we are in the world that we are, operating in a global economy.  We cannot change that, so therefore our focus must be on our businesses. My advice to business owners is to take all the steps they can to maximise profits and de-risk their businesses.

CBSL Accountants will be hosting a brief breakfast seminar at its offices on Shrewsbury Business Park on Friday 25th January at 0830 to highlight how businesses can increases their profits in 2019.  The seminar is open to all business owners and anyone wishing to attend should call 01743 249992 or email [email protected]