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How accurate are recent economic growth reports?

Forecasting the economy can be about as accurate as Nostradamus. As the joke goes, “economists were invented to make astrologers look good".

Bearing in mind this warning, (the often inaccurate) forecasts are for very subdued growth for the next three years (about 1.5% pa). Brexit uncertainty, continued austerity, limited job and wage growth all to limit growth.

As Kathleen McGurk, General Manager, Mastercraft Construction puts it “people are tentative about Brexit and want to see how things shape out before they commit.”

And the GDP figures for the first three months of the year confirm this view as the economy barely grew at all. And the slowdown was not all due to the cold weather.

But the first estimate of GDP is almost always revised significantly. It is too early to know if this weak first quarter will persist. 

So why don’t we ask the counter intuitive question, could the forecasts be too downbeat? 

According to Reed Accountancy & Finance clients, possibly. 30% said their business is performing better than last year and only 10% worse.

And if money talks louder than words, then you could be pretty optimistic.

Just last week, Japan’s Takeda bid £46bn for Shire Pharmaceuticals and Comcast bid £22bn for Sky. Brexit is not putting foreign buyers off investing in the UK. And these two huge bids are a continuation of a trend seen in the first quarter of the year. From January to March, the UK saw the largest takeover activity for a decade (only in 2007 was it higher). That is a big vote of confidence in UK business.

One of the reasons though for the gloomy economic forecasts is subdued productivity. But that could be too downbeat. 

45% of Reed Accountancy & Finance clients surveyed say they are investing more in productivity than they have in the past and only 7% say they are investing less. That is a stark contrast.

Ali Dhuka, Managing Director, Norbury Property Services “We have mostly invested in IT software this year. We already have a bespoke software system in place but we have been working with a new software provider to upgrade this.”

If Brexit limits immigration, then companies will be forced to invest to make their workers more productive rather than relying on cheap imported labour. Think of the car washing example. Why is it we have people washing cars when machines exist to do the work?  Cheap labour.

More investment increases productivity and should lead to wage growth, largely absent in the last decade.

The recovery, so far, has been driven by new jobs – over 3 million more people are in work since 2010. Unemployment has fallen from 8.5% to 4.2%, a 42 year low. 

The booming days of job creation are over. And so from now on, for households to spend more, they need to be paid more.

But there is little sign yet of significant wage growth, although falling inflation ensures that wages are at least keeping up with prices. The latest data for the month of March showed CPI inflation at 2.5% and wage growth excluding bonuses higher, at 2.8%. That’s the first time in a year that wages rose faster than inflation.

And inflation is falling because the pound’s devaluation after the Referendum is largely over. In fact sterling has actually been strengthening recently.    

If inflation remains subdued then any wage growth will boost spending and therefore the economy. 

And yet there is still caution. David Skinner, Finance & Operations Manager, Tenable Screw Company “We are playing the waiting game to see what ultimate result will be from March ‘19 onwards. 6 months after Brexit will be a key time for us.”

Six years into an economic recovery, would normally indicate a slowdown is due. We are in the late stages of an economic cycle. Exactly where is, even for Nostradamus, tough to predict.

For the latest #BigQuestion research, please get in touch with your local Reed Accountancy & Finance specialist here.

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