Voice of Business – Chairman’s blog May 2018

Posted by Neil Ashbridge

Fri 04th, May

UK GDP was estimated to have increased by 0.1% in Q1 ’18, compared with 0.4% in Q4 ’17, making it the slowest rate of growth since Q4’12.  While there were some adverse weather impacts in construction and retail these were generally small.

Within the Liverpool City Region the results of our Quarterly Economic Survey for Q1 ’18 broadly reflected the official data.  Business confidence overall was stable in Q1 ’18 as a sharp pick-up amongst manufacturers helped offset a slight fall among service providers.  This divergence between manufacturing and services was also reflected in the results for domestic and export sales, which dipped slightly in Q1 ’18, driven by a slowdown in services, while manufacturing recorded an increase, in part reversing the sharp fall recorded in Q4 ‘17. Orders also dipped but at a slightly slower pace than for sales and again driven by a easing in services, while manufacturing recorded an upturn.

Investment intentions (capital and labour) for manufacturers increased but remained below their level prior to the EU referendum, while for services intentions were broadly unchanged.  The anticipation of and uncertainty around Brexit appear to be weighing on investment intentions.  Employment intentions fell for both manufacturing and services in Q1 ’18, but are expected to pick-up in Q2 ’18.  Recruitment difficulties remain elevated for both sectors and are seen as a major barrier to business growth over the next two years.

The results for Q1 ’18 suggest that manufacturing growth has rebounded following a slowdown at the end of 2017, while services growth eased.  This could in part reflect a greater exposure to export sales amongst manufacturers, which are benefiting from a competitive exchange rate (16% below its 2015 peak) and strengthening global demand.  Service providers continue to be affected by slower consumption growth due mainly to the squeeze on household incomes caused by higher inflation and weak income growth over the last few years.  The squeeze on incomes however is likely to ease going forward as inflation falls back and income growth picks-up in response to the tightening labour market.

Looking forward, British Chambers of Commerce (BCC) upgraded its UK growth forecast in April from 1.1% to 1.4% for 2018 and from 1.3% to 1.5% for 2019.  The first forecast for growth in 2020 is 1.6%.  The latest Bank of England’s Quarterly Inflation Report expects growth to average 1.75% over the forecast horizon, a slightly faster pace than projected in Q4 ’17, while the Office for Budget Responsibility (OBR) has also increased its growth forecast for the current year by 0.1%, though they expect growth to ease somewhat in 2019 to 1.3% before edging up to1.5% at the end of the forecast.  The slightly improved near term forecasts mainly reflect slightly stronger consumer spending due to the easing in the squeeze on household incomes as inflation falls back and amid a moderate pick-up in pay growth.   Also, UK export growth is expected to remain robust supported by strengthening global growth.

Despite the slightly better forecasts UK growth is expected to remain well below historical averages and among the slowest rates of growth in the G7 until 2020 at the earliest.

While for many businesses the outcome of the Brexit negotiations is a key uncertainty, equally it is important that the domestic agenda is not overlooked.  It is important that the UK Government and regional bodies invest in the supply side of the economy to ease the pressures that are likely to impact businesses due to the UK leaving the EU, and to improve UK productivity, which has languished since the financial crisis.  In particular, a range of national and local infrastructure projects need to be started, while a clear strategy to address the emerging skills deficit needs to actioned.

This quarter, the Chamber’s Quarterly Economic Survey received 114 responses from businesses across the Liverpool City Region, representing almost 11,500 employees. 25% of the businesses that responded were from the manufacturing sector, whilst the remaining 75% came from services.

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