UK economy: Surviving global shock waves

How is the UK economy responding to current global influences, from the slowdown in China and the faltering US economy to a possible Brexit? Which sectors are thriving, and what are the implications for relocation and international assignment patterns?

City of London
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An almost palpable air of indecision is enveloping investors the world over. Their hesitancy may be understandable given the Chinese slowdown, the global fall in commodity prices, turbulence on financial markets, and a sluggishness in economies from India to Russia, Latin America to Europe.Even the powerhouse United States, despite better-than-expected jobs figures in the first quarter, has a manufacturing sector wallowing in recession.All of which, on the surface at least, would seem to leave the UK economy firmly in the doldrums, a situation aggravated, in the short term at any rate, by the uncertainty surrounding the outcome of the 23 June referendum on whether or not the country should remain a member of the European Union.A vote to leave, according to Bank of England governor Mark Carney, poses "the biggest domestic risk to financial stability", with potential consequences for the balance of payments, the housing market, foreign direct investment (FDI), and the banks.Yet buoyant GDP growth of around 2.3 per cent is still expected this year, despite such dire warnings over what might happen to FDI – and, indeed, to domestic investment – were a Brexit to become a reality. Portentously, perhaps, business investment in the UK declined by 2.1 per cent in the final three months of 2015, confounding City expectations of a 0.9 per cent rise and representing the largest decline since early 2014."Indications are that Brexit could jeopardise the UK's status as one of the world's top investment destinations," says Courtney Fingar, head of content for fDi Intelligence, an FT data service. He points to the importance of India and, increasingly, China – plus, of course, the US and the EU itself – when it comes to FDI in Britain. And much of that, he says, is reliant, at least in part, on the UK's having access to Europe's single market.However, a report compiled by Capital Economics for Woodford Investment Management suggests that concerns over FDI drying up if there is a ' leave' majority are "somewhat overblown". The report says, "Access to the single market is not the only reason that firms invest in Britain. Other advantages to investing here should ensure that foreign firms continue to want a foothold in the country."

Free trade the key

Lord (Mervyn) King, the former governor of the Bank of England, does not doubt that Britain will continue to be a global commercial power whatever the outcome of the referendum. He told the Daily Mail in March, "We've always been a global trading power, and we will continue to be a global trading power. The most important thing is to have free trade with as many countries as possible."It should be remembered, perhaps, that Britain runs a trade deficit with the rest of the EU (at least in goods, though it runs a surplus in services) but a trade surplus with the rest of the world. The EU accounts for about half of UK overseas trade, but this proportion is diminishing. The US is Britain's biggest export market after Europe, buying more than £35 billion- worth of goods from the UK in 2014.Brussels and Washington are continuing to negotiate the Transatlantic Trade and Investment Partnership (TTIP), a free trade deal between the EU and the US which, the British believe, could be worth billions in extra trade and create thousands of jobs. Yet this deal, along with Trans-Pacific Partnership between the US and Asia Pacific nations, might not survive November's presidential elections, with most Democrat and Republican candidates appearing distinctly cool on the whole idea of free trade pacts.And were Britain to vote to leave the EU, Michael Froman, the US trade representative, said last November that Washington would not be keen to pursue a separate free trade deal with Britain. "We're not particularly in the market for FTAs [free trade agreements] with individual countries," he said, adding that Britain, ifit left the EU, would face the same tariffs and trade barriers as other countries outside the US free trade network.It is, of course, in services that the UK leads the world. It has a trade surplus in services with the US – its biggest customer – France, Germany, China and Australia. In fact, India is the only country in the world with which Britain has a significant trade deficit in services, though the nation is also a modest net importer from the Philippines and Pakistan, presumably because of the locations of call centres.And it could be the services sector that determines whether or not Chancellor of the Exchequer George Osborne achieves his aim, first spelled out last autumn, of making China the UK's second-largest trading partner by 2025.Since President Xi Jinping visited Britain last year, the two nations have been talking about a new "golden era" in relationships, despite the downturn in China's economic fortunes, which has dented both its economy and many economies in emerging nations.
Still, the drive to make London the centre of a drive to internationalise the yuan (renminbi) – and a proposed link-up between the London and Shanghai stock exchanges – could prove a massive plus for the UK's financial sector."London's renminbi trading business is helping build stronger trade and business partnerships between the UK and China, which helps create jobs and growth in both countries," Michael Bloomberg told a trade exhibition in the spring.Speaking at the China-UK Joint Economic and Trade Commission meeting in Birmingham earlier this year, Commerce Minister Gao Hucheng said that China and Britain had a rare opportunity to promote bilateral trade. He said economic structural reforms and sustainable development pursued by both governments provided rare opportunities for cooperation, and he called on the UK to play a leading role in the EU's efforts to reach a China-Europe investment agreement and move forward with a feasibility study on a free trade deal.

Brexit's implications for jobs

Such matters, however, rest on the UK's remaining within the EU. A vote to leave would cause, at best, uncertainty on trade, while the effects of a Brexit on some jobs in Britain could be profound, particularly in the financial and technology sectors, with companies anxious to retain a presence within the EU being forced to relocate staff.A poll of 700 British and German companies, carried out in February by German think tank the Bertelsmann Foundation, found that 29 per cent would either reduce capacities in the UK or relocate altogether in the event of a Brexit.Some 41 per cent of businesses in the IT and technology sector said they would consider decreasing capacity or relocating. Even in the manufacturing sector, 26 per cent of respondents said they would consider leaving Britain.Governor Carney has admitted that several major banks are "contingency planning" to move headquarters out of the City of London and that, "without question", the City would lose business if it failed to negotiate a continuation of existing mutual recognition agreements after a Brexit.In March, recruitment firm Manpower published a survey of more than 2,000 UK employers, which found that some major UK companies were warning of moving high-quality jobs from Britain to other countries should there be a vote to leave. The report also found that the nation's shortage of skilled workers could only get worse in the event of a Brexit, because employers increasingly relied on the free movement of people inside Europe.Pointing out that more than 200,000 British jobs were filled by people from across the EU last year, James Hick, Manpower's managing director, said, "Let's be realistic: we simply won't be able to replace overnight the skills these people bring to the UK if we were to leave the EU – and it's our economy that will suffer. Unemployment is at its lowest level since 2006. It's unrealistic to suggest there's enough slack in the labour market out there to fill these jobs."Nevertheless, the survey also found that the hiring intentions of firms across the country were at their highest since 2007, reflecting the continuing confidence in the nation's economy and its potential for growth.The International Monetary Fund describes the UK economy's recent performance as "strong", while adding that the EU referendum poses a "risk and uncertainty". Although George Osborne remains confident of continued growth, he has warned of a "dangerous cocktail" of risks for the remainder of the year, ranging from the slowdown in global economic growth to stock-market volatility.Fortunately, the UK's services sector, which accounts for more than three- quartersof GDP, has continued to perform strongly – just as well, since manufacturing, construction, exports and, of course, the North Sea oil industry have been struggling.

Exports a challenge

Allie Renison, head of trade policy at the Institute of Directors, says that there are long-term concerns about Britain's export performance. She describes as a "monumental challenge" the task of trying to meet the government's ambitious target of £1 trillion in overseas sales by 2020.But she adds, "Encouragingly, there are some silver linings to these stormy clouds. British firms appear finally to have started to seize more exotic trade opportunities. Despite the global slowdown, our trade deficit with non-EU markets is at its lowest level in a decade – narrowing by more than half over the course of last year."As growth remains elusive across much of Europe, the fact UK firms are looking further afield underscores how important it is that the EU pursues an ambitious trade policy with the rest of the world."Once again, it is Britain's dominant services sector that will power export growth over the next few years. Our world- leading financial services, professional firms, creative industries, and tourism industry are punching above their weight on the global stage."It is their success in tapping into growing markets and fledgling middle classes in countries like China and India that will underscore the health of Britain's economy in years to come."
Skills shortages, low productivityOne cloud on the horizon is the continuing shortage of skilled staff, especially in engineering, the construction and tech sectors, and medicine. Such shortages could worsen, not only by a vote for a Brexit resulting in a reduction in EU migration, but if the government accepts a proposed clampdown on the Tier 2 visa scheme under which skilled workers come to Britain from nations outside the European Economic Area.Chris Williamson, economist at research firm Markit, says the latest official data on growth "paints a picture of an unbalanced economy that is, once again, reliant on consumer spending to drive growth as business shows increased signs of risk aversion".He adds, "Growth is being supported by firms increasing the wages paid to workers alongside low inflation, which is clearly good for household incomes in the short term."But for a sustainable recovery, which involves improvements in productivity and profits, we also need to see business investment revive, something that will only happen when business confidence lifts higher again."And when will that happen? Few people are prepared to hazard a guess until after those 23 June referendum votes have been counted. Relocate Global Spring Issue 2016

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© 2016. This article first appeared in the Spring 2016 edition of Relocate magazine, published by Profile Locations, Spray Hill, Hastings Road, Lamberhurst, Kent TN3 8JB. All rights reserved. This publication (or any part thereof) may not be reproduced in any form without the prior written permission of Profile Locations. Profile Locations accepts no liability for the accuracy of the contents or any opinions expressed herein.

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