Current state of the economy (2018)

Jan 10, 2018 | Sector & policy

Vicky Pryce, Chief Economic Advisor at the Centre for Economics and Business Research and former joint head of the Government Economic Service, spoke at this year’s ISE Student Recruitment Showcase. Here she shares a current perspective on the state of the UK economy.

The UK has proved reasonably resilient so far following the shock referendum result. 

Of course we haven’t left the EU yet and trading conditions remain the same. We have also benefited hugely from a sharp fall in the pound and a strong recovery in world trade, helping manufacturing exports, but tourism numbers have also been high and services have done well.  

More importantly though, the underlying economy has been sustained by a massive injection of funds by the Bank of England to prevent a financial meltdown since the referendum vote and a generally easy monetary stance with record low interest rates. 

Costs to taxpayers

But the extra subsidised lending through the banking system to businesses and consumers that was encouraged after the referendum vote has already added some £100b to public debt and this will have to be paid back by taxpayers. 

And the additional £60b of quantitative easing since the referendum also needs to be accounted for as well as the extra £3b in preparation costs for Brexit and of course the £1.5b to DUP to guarantee their support of the minority government that emerged after the 2017 snap election.  

And there is unlikely to be relief from EU contributions. The ‘divorce bill’ negotiated in rough terms in December as part of the Phase I negotiations will have to be paid and it is likely that we will continue to want to contribute to parts of the EU budget to guarantee access to the single market, which many sectors need.  

And the costs to the taxpayers will continue beyond – as we now hear from Michael Gove, subsidies to farmers, for example, will continue through transition period and beyond. 

Broken rules

Unsurprisingly, fiscal projections and future public sector borrowing expectations have deteriorated considerably. 

George Osborne’s fiscal rules have been abandoned, substituted by laxer ones. Instead of a balanced budget by 2019, we now look forward to one by the middle of the next decade.

Although the government can still borrow cheaply to fund the extra financial gap, we have had two credit rating downgrades already as the public debt situation worsens. In view of lower growth projections, the expectation therefore is that further cuts in public services and/or increased taxes are inevitable. 

At least we are now proceeding to trade talks. However, the short to medium term priority will not be in negotiations with new trading partners, but with the countries the EU already has agreements with. 

And of course, what final agreement is achieved with the EU will need to be known before any new deals can be agreed. And that may not be before 2020 – at the earliest.

Business impact 

This all adds up to uncertainty and affects business confidence. 

Interestingly, in 2018 all developed economies are expected to grow even faster this year than last year, but with one exception – the UK. And it would have been worse without the fall in the pound, which has helped manufacturing exports, with sales abroad also benefiting from strong growth in Europe, and a pick up in world trade and activity generally. 

And Brexit uncertainty has inevitably impacted on employment and investment decisions. 

The fall in the unemployment rate is because businesses have employed more people rather than invested to meet increased demand. 

Despite the emergence of skills shortages in some sectors, many new jobs are generally low pay/low productivity jobs, and wages are lagging behind because of the pick up in inflation caused by the fall in the pound. 

This is already affecting consumer spending and consumer confidence. While there are signs that business investment may be picking up there has already been big loss in productive potential and innovation, and therefore also productivity. 

Was this article helpful?
Tags: Economy


Share This