Directors are supremely pessimistic on economy
Directors are feeling supremely pessimistic about the outlook of the UK economy, although the mood may be worse than the reality, according to Kitty Ussher, former MP, now chief economist at the IoD.
This was the key takeaway from a survey that IoD members had taken part in November.
She was speaking at the IoD Guernsey branch’s January business breakfast event, where she highlighted three economic headlines – the economy, inflation and unemployment.
‘The economy contracted by 0.2% in Q3 (2022) not helped by the period of mourning,’ she said.
‘The latest data [from November] was better than expected, meaning we may avoid the technical definition of a recession. The difference in the official forecasts depends on assumptions around interest rates and consumer behaviour. Unless something changes, we expect any downturn to be short, and it looks like the prime minister agrees with us. The Bank of England meanwhile continues to eat humble pie.’
On inflation, she said that annual CPI inflation was 10.5% in December, down from a peak of 11.1% in October, with falling petrol prices the main driver.
Unemployment in the UK had remained low, and was not expected to rise as much as following the financial crisis.
She said that macro-economic concerns were preying on leaders’ minds and were driven by the perception of high rates of inflation. However, the view for the second half of the year was more upbeat.
Richard Hemans, chairman of IoD Guernsey’s economic sub-committee, said that Guernsey’s economy was performing better in real terms since 2009 and was now above pre-pandemic levels, outperforming Jersey and UK.
‘The economy rebounded by nearly 6% in 2021 after declining heavily during Covid,’ he said. He suggested that consumer spending was flat, while government spending and business investment grew, with rapid growth seen, particularly in support services.
‘The economy will inevitably have felt the impact of inflation and higher interest rates,’ he said, citing high food and energy prices and a tight labour market post-pandemic as factors, as well as international issues such as the war in Ukraine. Rising interest rates in the UK should help to bring inflation down, he said.
‘Most sectors will likely have grown in 2022 although it would have been more subdued in the finance sector, given the fall in employment and the difficulty in finding staff. As far as 2023 is concerned, I think growth will be even more subdued, probably flat to low.
‘A weaker UK economy will also have an impact on the island. Consumer spending will be slightly fragile because of higher inflation and interest rates which will reduce earnings, but this will be offset by household finances remaining quite strong and unemployment being stable.
‘Looming tax rises could actually stimulate spending.’
Mr Hemans said that he felt government spending would increase as the fiscal surplus falls further, which means that spending is rising faster than taxation.
‘Business investment will likely be weak because of lower demand cost pressures, rising interest rates, uncertainty and destocking profits are likely to fall or standstill. It’s likely the finance sector will continue to be affected by the consolidation we’ve seen in recent times.’
He said that the outlook for housing appeared to be negative but there were a number of factors that were supportive of the local housing market.
‘Guernsey, as we know, is a very attractive place to live, with a population strategy that’s encouraging more people to move to the island.’