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General Election Result Should Not Delay Economic Reboot

Posted: 19th June 2017 by Finance Monthly
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The new Government has to prioritise economic renewal, encourage investment and provide more support to businesses looking to grow according to Michael Izza, ICAEW’s chief executive. In anticipation of the Queen’s Speech later this week, he is urging ministers to take steps now to head off a looming threat to economic growth from weakening business investment, rising inflation and slower wage growth as revealed in ICAEW’s latest forecast.

“We cannot underestimate the impact that the current outlook for the UK has on business confidence,” said Michael Izza. “The vote for Brexit, the outcome of the General Election and looking ahead, the negotiations on leaving the EU all help build uncertainty and create a hiatus in making long term changes to our tax and regulatory systems.

“In the current climate, businesses tend to see the potential risks rather than the rewards of investing. I would like to see the new Government put business and the economy at the top of its agenda, doing more to create a climate of optimism and certainty which will help build confidence. It also needs to send a clear signal to the rest of the world that Britain continues to be an good place to do business, to invest and to trade. Not to do so could put at risk the economic progress we have made over the last two parliaments.”

ICAEW has also published its Economic Forecast for Q2 2017 which has revealed:

  • Real income losses for households. Weaker growth in demand for workers, along with upward pressure on non-wage labour costs faced by firms, suggest that wage growth will remain around 2% in 2017. With the Bank of England expecting inflation to remain close to 3% for the year, this will lead to a squeeze in household incomes through the second half of 2017.
  • Weaker business investment in 2017, but potential for faster rebound. Investment recovered a little in Q1 2017, but ICAEW continues to forecast a modest fall for the year. However, firms’ financial positions and profit margins remain good, and borrowing costs will remain low for quite some time. But given the uncertain domestic political outlook and difficult Brexit negotiations to come it seems likely firms will continue to exercise restraint in their capital spending.
  • Labour market to remain tight. Recent labour market data suggests the degree of spare capacity remains historically low, while BCM evidence shows firms expect to continue to create jobs in the year ahead. At just 0.7% for the year, the rate of private sector employment growth will be the slowest since 2012. Given the continued growth in working-age population, this rate of job creation will be just enough to stabilise the unemployment rate close to the current level.
  • Q1 slowdown could prove temporary. GDP growth slowed sharply from Q4 2016 to Q1 2017, with the 0.2% reported in the first three months of this year - the slowest increase since 2014. We expect GDP growth to rebound a little in the remainder of 2017, with exports playing a greater role in driving growth than in previous years. We have nudged up our forecast for GDP growth in 2017, from 1.6% in our last report to 1.7%.
  • Long-term fiscal risks still not being tackled. The last fiscal year delivered the smallest budget deficit in cash and GDP terms for almost ten years. But early evidence for 2017-18 suggests that the slowing economy is hurting the UK’s fiscal position.  The election campaign has demonstrated that no consensus exists on how to tackle longer-term risks to the public finances.

Michael Izza adds: “The voice of business needs more prominence within Government’s plans to rejuvenate the economy. The political parties, who largely ignored business in their manifestos, must now engage with the business community if UK companies are to thrive in a post-Brexit landscape.”

(Source: ICAEW)

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