Sunday, March 17, 2019
Views from the brink: how slow growth and uncertainty leave firms on the edge
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

What, amid the Brexit chaos – which grows ever more chaotic by the week – have we learned about the economy? Alongside Philp Hammond’s spring statement, the Office for Budget Responsibility (OBR), revised down its growth forecast to 1.2% for this year, the weakest since the crisis, and predicted that the economy will expand by an average of about 1.5% over the following four years.

That assumes a smooth Brexit, a brave but necessary assumption (the OBR is required to forecast on the basis of government policy) and reaffirms that, even if we get over the short-term hurdle, the challenge of lifting Britain’s growth rate to something like past norms will remain considerable.

The OBR is gloomier about business investment than it was, expecting a fall of 1% this year, similar to last year’s drop, and growth averaging only just over 2% a year from 2020 onwards. This is no strong revival of pent-up investment some talk about and will leave productivity growth languishing at just over 1% a year in the medium-term.

The official forecaster is more comforting about future earnings growth, which it sees rising by just over 3% a year, and rising employment, which it thinks will continue, though at a significantly slower pace than over the past few years.

That combination is good for the public finances as, oddly, is weak business investment; when firms are investing, which can be offset against tax, it is bad for corporate tax revenues. Rising inequality is also good for the public finances. The top 0.1% in Britain are doing very well and generating a lot of income tax receipts. That, without dwelling on it today, could be a golden goose that gets cooked if there is a change of government.

So we have the strange situation in which growth disappoints but the chancellor’s room for manoeuvre has increased. It was thought he would have £15.4bn of room for manoeuvre for this year’s spending review, and possibly some tax cuts; now the OBR thinks it is £26.6bn, though half of that could disappear as a result of the new treatment by official statisticians of student loans.

Those are the headlines but what I wanted to do today is try to get under the bonnet of the figures and tap into what the Institute of Chartered Accountants in England and Wales (ICAEW) describes as “the economic instability resulting from the current uncertainty”. The ICAEW on Friday also revised down its growth forecast to just over 1%, an outlook it described as “frail”.

Two weeks ago I launched a bit of informal “crowdsourcing” to try to take the pulse of what was happening to small and medium-sized firms in Britain amid the uncertainty, following one reader’s claim that a “meltdown” was under way. The results, as I stressed then and stress again now, were never going to be scientific but do provide an insight.

In particular, they have enabled me to identify four categories of business in Britain. First on the list are those for whom the phone stopped ringing even before the current heightened uncertainty, and which are hanging on and hoping that something will turn up.

Typical descriptions of current business activity from those in this category were “sales slump”, “dramatic decline”, a warning that a mild decline now would turn into bankruptcy in the event of a no-deal Brexit, and “a disaster with a 60% drop in revenues”.

One business said turnover “fell off a cliff” last autumn, had stabilised this year, but was still well below normal. Another said that the current “plunge” in orders was worse than anything during the financial crisis a decade ago, which others also drew comparisons with for the “suddenness” of the downturn. Yet another said that this year had been “a complete blank” for new orders. One feared that the current sales downturn would be followed by “years and years of misery”. Quite a few thought we were on the brink of recession. Worrying.

Then there was a second category of firms. These were ones for whom business is currently fine, but who believe that a big reason for that is pre-Brexit stockpiling, either here in Britain or by customers in Europe. The fear among them was that this is giving a false reading of the underlying strength of their businesses and that there will be payback later.

Some firms it should be said, report business as usual; my third category. Business owners in this group are exasperated by the political shenanigans and wish that we could move on from Brexit and tackle some of the other issues that concern with them. But for them life goes on, and they and their customers are getting on with it.

Finally, there were the businesses which are doing well; gaining market share and exploiting new opportunities. For some of these, business has never been better, while others are continuing on a strong growth trajectory. If you wanted to be optimistic about the outlook, you would take your cue from these.

It is, of course, the balance between these four types of business which will determine what will happen to the economy over the next 12-18 months and indeed beyond. The biggest category of responses I received fell into the first category; that of firms experiencing a sharp and pronounced downturn and unsure of when it will come to an end.

That may reflect the nature of my initial query, which was based on the experience of a firm experiencing similar problems. It was not, as I say, scientific. But it is also the case that when growth is slow – and the surveys suggest it is even weaker than the snail’s pace expansion of the latest official figures (0.2% over three months), more businesses will be in trouble.

We know that retailers are having a tough time, with many casualties already. The housing market is deep in the doldrums too, as the latest downbeat survey from the Royal Institution of Chartered Surveyors confirmed. Other sectors are struggling.

Business and consumer confidence need a lift, or some of the tales of woe I have been hearing will have only one result. It is not entirely obvious this weekend where that lift might come from.