THERE’S a somewhat unfair stereotype that people from Yorkshire are a gloomy bunch. However, if the mood at our recent annual investment forum in Leeds is anything to go by, our clients certainly don’t fit this typecasting.
Measured against the sentiment in the other cities we visit around the UK, the relative optimism on the outlook for the Yorkshire economy was striking, with almost three-quarters of our audience saying they felt confident about economic growth in the region. We share that sense of optimism, but 2018 won’t be without its challenges.
Businesses in the region will be operating in the context of slowing UK economic growth this year. Following a better than expected expansion of 1.8 per cent last year, we expect growth to slow this year and next, and be the weakest in the G7.
Brexit will, of course, play a role. While less than one third of our clients in the region say Brexit has affected them so far, uncertainty is likely to weigh further on business investment and hiring as firms continue to adjust their operations in anticipation of the UK’s eventual departure from the EU. This cloud is likely to hang over business and consumer sentiment until the final terms are known – and negotiations won’t necessarily take a smooth path.
Businesses will also feel the impact of a likely fall in household spending. The effect of higher interest rates following the recent hike is likely to hit first, while a more challenging labour market could also cause consumers to pare back their spending even more.
But its not all doom and gloom – other obstacles should fade as the year progresses. With inflation gradually trending back towards the two per cent target, it looks as though the pressure on real income growth will ease in the coming months. We’re also seeing tentative signs of life in terms of wage growth.
And while it is far too early to see a rebound in business investment, the prospect of a cliff-edge moment for the economy does seem to have faded following the progress made in recent months. We are optimistic that that a transition deal will be concluded, as it is in both sides’ economic interests to see one. Little should change operationally for firms during this transition period, easing the adjustment. This is, of course, subject to negotiation.
As a relatively open economy, the UK is impacted significantly by the global backdrop. We forecast rising broad-based global economic growth in 2018, which together with the under-valued pound should enable net exports to boost domestic GDP over the next couple of years.
This mixed and uncertain picture points to an economy muddling through. But – despite what we might read in the media – Brexit need not have a net negative impact on the UK economy and businesses.
The EU referendum has brought to the fore imbalances in the UK economy. Here, there is a real opportunity for businesses in Yorkshire to benefit.
We all know that measures of productivity show the South East outperforming the rest of the country. Now, we hope that Brexit will act as a catalyst to bring about tangible change as the Government puts into action its Industrial Strategy. Could we see the promises of the Northern Powerhouse project become a reality over the next few years?
Increased efforts to address regional imbalances as the UK finds its footing outside of the EU could help to spread prosperity more evenly across the UK, and, as a result, lift the economy’s productive potential. If acted upon with a true regional focus, the five foundations of the Government’s recently published Industrial Strategy (ideas, people, infrastructure, business environment and places) should deliver significant benefits in the years ahead.
In Yorkshire, transport infrastructure should be an immediate priority. With transport spending per head in Yorkshire just one tenth of that in London, it’s little wonder that conducting business between cities can be cumbersome. Improving transport links will improve inter-regional connectivity, trade and bring more of the workforce within reach of more jobs.
Businesses must also play their part. Investing more in upskilling workforces may not be the first thing that springs to mind amid current political and economic uncertainty. However, in the long run, a more skilled workforce will be a more productive, and thus more profitable, one.
Brexit negotiations are likely to deliver some positive and negative surprises as both sides flesh out the long-term relationship. But should companies in Yorkshire work alongside the Government to tackle productivity in 2018, we see no reason why they shouldn’t be optimistic. Against this backdrop, we have confidence that businesses the region will make the best of the challenges and opportunities to come.
Dean Turner is an economist at UBS Wealth Management.