Economic MeltdownAt the turn of the new year, economists provide their financial predictions akin to the great Nostradamus. They predict a bleak outlook for the UK economy in 2018, but such forecasts are not always accurate.

The continuing uncertainty of the Brexit negotiations is likely greatly to affect the prospects of any improvement in the UK economy in 2018. Respondents to the Financial Times annual survey of economists (“FT Survey”) also cited as concerns for the UK economy high levels of debt amongst consumers and fears of a downturn in UK trade productivity in comparison to the upturn in the rest of the world.

According to the FT Survey, high levels of borrowing in 2017 enabled consumer spending to remain relatively stable despite the increases in inflation. However, the disposable income of British households has reduced in real terms and they are increasingly turning to unsecured borrowing to fund their spending needs. The Financial Conduct Authority and the Bank of England have both raised concerns about the sustainability of the present trend. Several days before Christmas, the Office for National Statistics highlighted that net borrowing by households had increased by 75 percent from the previous quarter to £2.8bn. The obvious pre-Christmas scamper for credit aside, this is the only instance since 1987 of householders being net borrowers for four successive quarters.

This is a cause for concern for the Government, with people living beyond their means likely to result in greater individual insolvency. It is also likely to mean less spending on consumer goods in 2018, as liabilities are repaid. John Hawksworth, chief economist at PwC, said that “there are limits to the ability of households to further increase their borrowing levels which is likely to continue to bear down on real consumer spending growth”.

Economists in the FT Survey were also wary about the short-term effects of the Brexit negotiations on British business. PwC predicts GDP growth will slow to 1.4%, whilst Moody’s Analytics is less optimistic and predicts growth of 1.3%. Investment in the UK is expected to stagnate due to the uncertainty over the trading arrangements with the EU post-Brexit and the decline in UK productivity over the past decade. A few respondents said that the UK would become the “sick man” of Europe.

This is in contrast to the expected global boom for other nations, stimulated by the US which has an expected GDP growth of 2.5% according to PwC. The improvement in US fortunes follows the trend in other world economies, with global growth at 3.7%, Germany at 2.3% and France at 2.0%. Comments from the International Monetary Fund corroborate that UK “business investment growth has been lower than expected in the context of strong global growth and high levels of capacity utilisation, owing to heightened uncertainty”.

However, other economists are less pessimistic and expect that the fall in the pound following the EU referendum will lead to stronger export growth during 2018. One respondent said “Given the survey evidence relating to business confidence and export demand, there is scope for UK economic activity to present a surprise on the ‘up-side’ and scope for the present data to be revised up in the years ahead”.

Additionally, the Institute of Directors (“IoD”) indicate that business leaders are optimistic about 2018 and refuse to submit to the cynicism surrounding Brexit. Stephen Martin, director general of the IoD, said “Everyone wanted to end the year on a positive note, and it is welcome to see that directors are cautiously optimistic for their own businesses. We have seen progress in recent weeks in the Brexit talks, and overall the economy has beaten the more negative predictions for 2017”.

The message to the UK government from all this is to broker a deal with the EU on key issues as soon as possible to minimise damage to the British economy and avoid handing the advantage to overseas competitors. The new year is likely to be tempestuous and UK business may need to batten down the hatches until the outcome of the Brexit negotiations becomes clear.