It’s going to be tough, but the horizon has bright spots says HSBC’s chief economist

Mark Berrisford Smith HSBC

The UK will struggle to do as well outside the European Union as it did inside, according to Mark Berrisford Smith, Head of Economics for HSBC UK Commercial Banking.

Mark was speaking at a special economic briefing co-hosted by HSBC and Cheltenham-based accountants Hazlewoods. The morning event attracted around 100 senior business leaders from across the region.

However, while it might be the only thing that the UK is talking about, Brexit isn’t the only game in town for the world’s economy, he said. “The last year has proved rocky for the global economy, and Brexit is coinciding with that.”

And the EU hasn’t made things easier for the UK. Since the referendum, it has stepped up its trade deal pace. The deal with Japan is done and working, and a deal with Singapore is expected to be finalised later this year. Talks with Australia are also expected to begin.

“We have learned that the world of international trade diplomacy is rough. It’s about making commercial advantage,” said Mark.

The world is due for a global downturn, he warns. “You can’t stop a downturn, it just depends how long and how deep it will be,” he added.

A particular feature of this downturn is that it is likely to be largely about trade, he said. “18 months ago, global trade volumes in goods were around five per cent a year. They’re now around two per cent.

“Trade is now bi-lateral and regional. It’s about deal-making and about having armies of your own trade negotiators going out to other countries where you can find cross-cutting commercial interests to make them happen.”

While the manufacturing sector is a drag on the economy, with the well-documented problems in the global car market, there are bright spots, he said.

“Professional and business services are the real power house of our economy. While financial services are still important, they are no longer the engine of our growth.”

“Accountants, lawyers, marketing and technical consultants have created 1.5 million jobs. That part of the economy is still growing at an annual rate of 4 per cent.”

And the UK economy isn’t doing any worse than many other countries, he added. The Germans only just missed recession last year and Italy is in recession.

“Having a strong professional services sector was good for us. And surprisingly retail as a sector last year wasn’t bad. Although I know that some of them are struggling.”

But confidence remains low in UK households and businesses, especially since the vote last November, he conceded.

“A lot of firms have put off investment. If we get an EU deal, some of this might come back – but some of it will now never happen, as that investment will have gone elsewhere.”

UK business investment spending has fallen over four consecutive quarters, which normally only happens in a recession. “We should be investing more, and we are investing less. Firms are cautious and worried about investing. They are hiring people, but not investing in their systems.”

However, the downturn that was caused by the fall in the pound after the referendum has gone and real incomes have risen. The oil price has also dropped. The currency shock induced by the Brexit vote has passed through. “We have an inflation rate of 1.8 and average growth rate of 3.4. There is clear water in the right direction,” said Mark. “People are better off. By and large earnings are rising faster than inflation.”

But the housing market is stagnant and likely to stay so. “The Government wants this. It is spending a lot of money on help to buy and it’s having an effect. It has energised the bottom end of the market.

“If we can get Brexit over the line and resolved, there are quite a lot of positives. Consumer spending, which is 65 per cent of our GDP, will rise as confidence grows.”

However, job vacancies are at a record high, and with fewer Europeans available as they return home where jobs are on the rise, along with living standards, employers are finding it increasingly challenging to fill vacancies.

If Brexit gets across the line in an orderly way, the pound will be rocket fuelled, and will rise quickly.

But Mark expressed concern about what will happen if, despite our best endeavours, the UK leaves without a deal.

Exports to the EU will fall, because things will be more expensive with tariffs and UK companies will struggle to source replacement goods in the UK – and finding them on the wider world markets isn’t as easy as it might sound.

“You don’t have to do much to our economy now to cause it to contract,” warned Mark.