The Conservative government has just completed its first year of being in sole power. While the past 12 months have seen numerous reforms in various sectors in the UK, there have been challenges too, especially with the recent resignation of former secretary of state for work and pensions Iain Duncan Smith and the split in the Tory party over the EU referendum.
Uncertainty in global markets and challenges on the domestic front, such as the EU referendum, have kept the UK economy on its toes. The Office for Budget Responsibility (OBR) recently cut forecasts for the economy. It had previously forecast growth at 2.4 per cent this year, but has now revised that to 2 per cent.
However, the government has fallen short of meeting some of its economic targets, deficit reduction being one. The original deficit target was £73.5bn for the year, but this was revised down to £72.2bn by the OBR. Recent reports from the Office for National Statistics (ONS) show the UK budget deficit narrowed in February on higher receipts. During his budget speech in March, George Osborne admitted missing the fiscal target, but added that he expects the UK to clear its deficit by 2020, despite slower than expected growth.
David Stubbs, global market strategist at JP Morgan, says this has resulted in some uncertainty in financial markets. “There has been somewhat of a loss of momentum,” he says. “You still have tepid growth conditions; a lot of financial market uncertainty. Then of course, the Brexit debate as well, which at the margin has been hurting some of the sentiment indicators in the UK. It is a question that remains important with the UK economy.”
He adds that we have seen considerable turbulence in the oil industry, with low oil prices impacting on the UK economy and remaining a cause for concern. However, Mr Stubbs believes that despite a weaker growth expectation for the next year or so, the UK is still in a fairly decent place compared with a lot of other countries in Europe.
PWC’s UK Economic Outlook from March 2016 reaffirms that view: “The UK recovery since mid–2009 has been relatively slow by historical standards, but still faster than most other G7 economies over this period.” The report further states that while UK GDP growth slowed a little in 2015, consumer growth remains relatively strong. Chart 1, using data from the UK government, shows the predicted change in the UK GDP forecast from 2014 to 2020.
Business investment has rebounded reasonably strongly since mid-2009 after being hit hard by the recession, according to PWC. However, as per preliminary ONS estimates, it did falter in late 2015. Analysts have attributed this decline to concerns about the EU referendum and debate over the implications of potential outcomes.
“I think what business people look for is continuity and stability and the notion that we are moving in the right direction,” says Andrew Sentance, former Bank of England monetary policy committee (MPC) member and senior economic adviser at PWC. “In terms of the big issues such as getting the deficit down, we have got the continuity and stability. There are debates about whether George Osborne is going to meet his targets. Well, he is certainly moving towards those targets.”