The optimistic case for the British economy

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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.

“Gray gloom” just isn’t the front-page headline many Britons would have needed to learn firstly of the brand new yr. However the phrase sums up the financial temper based on the Monetary Occasions’s annual survey of economists. It’s simple to see why. The UK financial system shrank within the third quarter of final yr, placing it on the cusp of a recession. It’s anticipated to develop by about half a per cent in each 2023 and 2024 because the impression of excessive rates of interest and elevated value ranges squeeze households and companies.

Economists are a melancholy bunch. A equally downbeat outlook this time final yr turned out to be overly pessimistic. Inflation fell quicker than anticipated and unemployment didn’t surge as predicted. Revisions to gross home product additionally confirmed that Britain’s post-pandemic restoration was according to G7 friends, and never the worst as beforehand forecast. Wanting forward, there are a couple of the explanation why the bearish outlook on Britain might weaken.

First, Britain begins 2024 with a extra secure coverage outlook than within the current previous. Which may be a low bar, given the political turmoil since 2016, however up to now yr the federal government has overseen an enchancment within the enterprise surroundings. Ties with the EU have improved, and the UK has rejoined the bloc’s Horizon Europe science and analysis programme. The complete expensing of capital funding was additionally made everlasting within the Autumn Assertion. The UK’s capital allowances at the moment are among the many most beneficiant within the OECD, and companies are spending once more. Funding has lastly jumped above ranges earlier than the Brexit referendum.

The UK can also be one of many few main economies the place an election can be contested this yr between two comparatively centrist events, with no far-right get together difficult for energy. Prime Minister Rishi Sunak has admittedly put vote-grabbing above financial pursuits in some areas, together with insurance policies to slash authorized immigration. However each principal events are engaged in moderately constructive debates on enhance long-term development, which incorporates reforming byzantine planning legal guidelines and rethinking whether or not UK pension funds might make investments extra successfully. A major Labour get together victory, as polls point out, additionally factors to continuity within the medium time period.

The shift in the direction of calmer waters appeals to traders. The financial system might see an honest rebound, notably if world financial circumstances additionally enhance. Slightly below 50 per cent of executives surveyed by Ernst & Younger in June anticipated the UK’s attractiveness for enterprise to rise within the coming years. Many companies have now adjusted to costlier EU buying and selling preparations, and with a number of destructive information priced in, low-cost UK shares may very well be in for a resurgence in valuation. Actual-terms wage development and steeper than anticipated cuts to rates of interest may bolster near-term financial exercise.

Britain has quite a few strengths it may well construct on too. It retains a comparative benefit in monetary {and professional} providers and is exclusive in having so many world-class universities unfold all through the nation — which, alongside its finance sector, helps to attract world expertise. London stays the most important hub for start-ups in Europe, which implies there may be vital scope for job creation and innovation. The UK can also be constructing a specialism in life sciences, superior manufacturing and renewable applied sciences. It’s already a pacesetter in offshore wind.

Low development and excessive charges paint an undeniably downbeat image for the yr forward. However continued coverage stability for companies, and wise measures to develop current benefits and emergent sectors, might imply the “gray gloom” begins to raise.