Economic forecast remains gloomy
- 21 Aug 2019
- Alasdair Hutchison
Last month, we reported some of the gathering clouds above the UK economy: sluggish GDP growth, stalling productivity, and fears over a global slowdown from ongoing trade disputes.
August has done little to dispel the sense of gloom. With a new Prime Minister promising to take the UK out of the EU on October 31st, ‘deal or no deal’, markets and business sentiment have been less than enthusiastic. Sterling is down 7 per cent since the start of May. GDP was buoyed temporarily in Q1 by stockpiling activity, then fell by 0.2 per cent in Q2 with manufacturing and services both under-performing. Business investment is weak globally, but has been particularly stagnant in the UK.
In these circumstances, it is perhaps unsurprising that the Bank of England, publishing its quarterly inflation report, concluded that Britain has a 33 per cent probability of falling into recession by the end of the first quarter of 2020 – even if a Brexit deal is reached.
More positively, the big news this month in the labour market was the continuing – and record-breaking – rise in self-employment. Data from the Office of National Statistics (ONS) revealed there are now 4.97 million self-employed people in the UK, with growth being driven by a strong rise in the number of women in self-employment. The labour market picture more generally remains a source of strength for the UK: not only is employment at its joint highest since 1971; wage growth also reached an 11-year high in the year to June.
What are freelancers making of the economic environment?
Our last Confidence Index, which noted a drop in freelancer earnings, foresaw the weak GDP figures in Q1 and we will shortly be publishing the full results of our latest survey. We can see from an initial glimpse at our findings that the highly skilled freelance sector has just marginally avoided a recession in Q2 of 2019. Quarterly earnings rose by just 0.03 per cent in this period. Nevertheless, freelancers are forecasting a 6 per cent increase in day rates over the next 12 months: an improvement on the 3.8 per cent increase in earnings that they achieved over the previous year.
Looking ahead, the results of this latest Confidence Index suggest that the sector is downbeat about the prospects of the broader UK economy. The next 12 months will be a challenging time for freelancers as they wait for the Brexit clouds to clear. The new Chancellor could lend a helping hand to the UK’s self-employed with an Autumn Budget that addresses some of the other factors that are affecting their business confidence, such as the extension of the changes to IR35 to the private sector.
The global picture
Elsewhere, the big global economic story of the month has been the jitters in the financial markets caused by one of the more reliable predictors of recessions. Amidst a broader global slowdown of economic activity, investors have been spooked by the so-called ‘inverted yield curve’ of US (and UK) government bonds. Essentially, this describes the process whereby longer-term interest rates on government bonds fall below shorter-term interest rates. As a recent BBC article notes, economists at the US Federal Reserve have stated that: "Periods with an inverted yield curve are reliably followed by economic slowdowns and almost always by a recession."
The sense of unease has been compounded by the German economy, where growth contracted by 0.1 per cent in the second quarter due to the poor performance of its manufacturing sector. The country’s central bank has warned the economy could shrink again in the third quarter, indicating a recession. Possibly seeking to dispel similar fears in the US – and with a 2020 election looming – President Trump has called on the Fed to cut interest rates by one percentage point and undertake some quantitative easing to further stimulate the economy.
There is an old phrase used in global affairs that when ‘America catches a cold, the world sneezes’. While the UK may be an island, it is not immune to these global trends. As parliament reconvenes to decide the pivotal next steps on Brexit in September, it will be doing so against a deeply uncertain backdrop – at home, in Europe and globally.
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Policy Development Manager