The last three readings of Fathom Consulting’s UK Economic Sentiment Indicator (up to October), have been stuck at -0.2%, a level last seen towards the end of the global financial crisis. The negative outlook has been driven largely by Brexit uncertainty, with all 12 components of the ESI at lower than normal levels.
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Despite contracting by 0.2% in 2019 Q2, data released earlier this month showed that the UK avoided a recession. Growth of 0.4% in July offset contractions in both August and September to show Q3 growth of 0.3%. Now in the midst of the election campaign, both major political parties are announcing policies geared towards revitalising the economy, with a specific focus on investment. British businesses have been holding back on investment in recent years, as they instead deal with rethinking supply chains and export contracts, uncertain demand, regulatory divergence, and more.
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The Conservative Party, for whom a working majority is Fathom’s central case, claim that getting Brexit “done” will finally give businesses the certainty they need to make forward-looking investment decisions. The solution is unlikely to be so simple. Even with the new Withdrawal Agreement, the question of the UK’s future relationship with the EU — which is the real cause of uncertainty — remains unanswered. Anything less than full membership of the single market will take time to adjust to and may permanently reduce the level of cross-border activity.
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The Labour Party on the other hand says that irrespective of Brexit, a decade of Conservative austerity, having failed to bring down national debt, is holding the UK back. They say that public investment, funded by higher taxes and borrowing is the shot in the arm that the British economy needs. The party therefore propose borrowing £400bn over the next ten years, taking advantage of the low-interest rate environment. However, if the first stage of borrowing does indeed lead to the kind of growth that the party is promising, inflation is likely to pick up. The Bank of England will raise interest rates, making the borrowing more expensive. There may also be concerns about Britain’s credit rating, and about how financial markets would react to the prospect of a Corbyn-led Labour government.
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