Risk & Economy » Brexit » Economic confidence in the UK remains low

Economic confidence in the UK has made a slight improvement in the third quarter of 2017, reaching its second highest level in over two years, according to findings from the latest Global Economic Conditions Survey (GECS).

Yet, despite this, confidence remains in negative territory and is low by historical standards, according to the quarterly survey of global CFOs and finance professionals, conducted by the Association of Chartered Certified Accountants (ACCA) and the Institute of Management Accountants (IMA).

According to the GECS, in Q3 the number of respondents expecting conditions to worsen exceeded those expecting conditions to improve by 5% – in Q2, this gap was 10%. The relatively upbeat nature of the survey mirrors the PMIs, global exports and GDP growth, which all suggest that the global economy is doing well.

Global confidence has benefitted from a sustained period of economic expansion since the global financial crisis, which has been most prominent across Asia, followed closely by Africa and Asia Pacific.

The UK and the US have continued to face headwinds, with confidence in North America falling for the second consecutive quarter in Q3, while the rest of the global economy is enjoying a strong recovery, with South Asia being the third quarter’s most confident economic region, while confidence levels were most depressed in Central and South America.

The number of people feeling less confident about the future exceeds those feeling more confident – the first time this has been the case since the third quarter of 2016.

Having been the most confident region in Q2, North America has now slipped to fourth place. The drop comes as the U.S. administration continues to deal with challenges in pushing through healthcare reform, tax cuts, and increases in infrastructure spending.

While economic confidence has rebounded in the UK, it remains low by historical standards, suggesting that, while investors are starting to put the uncertainty generated by June’s inconclusive election result behind them, confidence is still inhibited by other factors – Brexit in particular.

Although growth has slowed over the past year, it is continuing to hold up well despite the ongoing uncertainty. Unemployment has dropped and is now at record lows, and the pound, which fell sharply after the election, is recovering alongside speculation that the Bank of England will soon start to raise interest rates.

“The slowdown has not been caused by a loss of confidence due to Brexit, but by inflation rising because of the fall in the currency, which in turn is because of the referendum result,” says Andrew Kenningham, Senior International Economist, Capital Economics.

“At about 3%, inflation is getting close to a peak. It’s going to come down over the next year and as it does, real incomes should receive a bit of a boost and the drag from inflation should abate.”

The biggest concern for UK respondents was rising costs, which were cited by 50% of respondents, which could be because of the increase in prices after the sharp fall in sterling after the Brexit vote.

Another significant concern was movement in the exchange rate, which was cited by 31% of respondents. Although sterling has regained some ground since the start of September amid speculation of an early rate increase, it remains weak by recent standards.

Claus Vistesen sounds a note of caution: “The UK is now the worst-performing economy in the G7. Brexit is this monster that’s consuming everything at the moment politically, which means that there’s no real impetus or desire to solve any other problems.

“The UK economy borrows too much and saves too little, but nobody’s going to talk about that because they need to get this good deal together.”

When asked about the UK’s departure from the EU, respondents answers showed that businesses believe the risks created by Brexit exceed the opportunities.

The survey also found that respondents expect repercussions if the UK drops out of the EU without a transition agreement, with 63% saying they expect to be affected by, of which 22% expected the impact to be significant or that it will threaten the viability of some business activities.

A no deal scenario was also a concern, with 66% expecting it will affect them, and of this, 24% expecting the impact to be significant or to threaten the viability of some activities.

As with the past couple of quarters, the biggest worry for survey respondents was rising costs in terms of both wages and raw materials, which was an issue for 49% of respondents.

Second on the list was falling incomes, followed by concerns about securing prompt payment. The lowest level of concern was about suppliers going out of business, which, against the backdrop of a gradually improving global economy, is perhaps understandable.

The opportunity to explore lowering costs was the main positive development mentioned by respondents to the survey, followed by the opportunity to benefit by focusing on innovation.

Lowest on the list, and mentioned by just 15% of respondents, was the opportunity to increase orders, which suggests challenges for future demand.

“This quarter’s GECS suggests that the global economy is enjoying a strong recovery. While the global picture is optimistic, however, it does hide variations, with some regions doing much better than others,’ said Narayanan Vaidyanathan, senior business analyst at ACCA.

“In the UK, we saw a substantial drop last quarter and a slight recovery since – perhaps as a result of the perception that the government might be open to a flexible approach to find common ground in its negotiations with the EU.”

“Sentiment remains negative, however, with sterling remaining weak by recent standards, and inflation rising to 3%. This situation may ease over the coming year with the possibility of inflation coming down and increased government spending linked to some relaxation in austerity measures – which may help with increasing confidence.”

South Asia was the most confident region in this quarter’s GECS, with the region’s two biggest economies, India and Pakistan, set to grow strongly over the next year.