Insight on the current state of the economy and how it relates to Dorset by Nigel F Jump, Chief Economist of Strategic Economics Ltd (a Dorset Company) and Professor in Regional Economic Development at Bournemouth University. See: www.strategiceconomics.co.uk
Business Surveys point to a small loss of economic momentum in the early months of 2015, as reflected in the slowdown in first quarter real GDP. After May’s General Election, some uncertainty has lifted and the anecdotal evidence points to a more positive mood amongst Dorset business in recent weeks. The question now is whether the recovery can turn into a sustained upturn. The short answer would be “yes”. Positive consumer confidence and business intentions are supported by a small increase in real incomes that should maintain growth at perhaps 2.4% per annum through 2015.
Nonetheless, there are some potential hurdles to sustained recovery. The first will be the July Budget when the Chancellor is likely to set out the direction of economic policy for the five-year parliament ahead. It may be shorter on detail than the commentators would like, largely because the Comprehensive Spending Review is only just underway and will not report its decisions before a possible “autumn statement”. Nevertheless, some key issues for Dorset, ranging from fiscal and political devolution through development spending intentions to welfare benefit cuts are likely to be flagged next month. These matters will deserve careful interpretation.
A bigger hurdle is the whole process of renegotiation ahead of the EU referendum promised before the end of 2017. Whatever you think about the EU as a political force, the economics is simple: boundaries tend to increase costs, restrict markets and probably means economic growth will be less than it might otherwise be. The ‘single market’ project tends, therefore, to have support from economists and businesses alike because it offers the prospect of larger and fairer markets: the infamous ‘level playing field’.
This does not mean the EU trading zone, as currently constituted, is perfect or that it could not be improved – hopefully, the Prime Minister’s negotiations will move it in a positive way on these matters. It does mean, however, that, in the near term at least, leaving the EU will probably cause some disruption and uncertainty for Dorset business. In the long run, the economy will adjust to the new reality, whatever it is, but the concern is for the pace of the current recovery over the next few years.
In particular, if you are a large and/or multinational company selling across Europe from a UK base (especially US, continental or Asian companies), you are likely to be cautious about local investment until the outcome of the referendum is known. You may not decide to close your UK operations outright or to curtail current production/service supply functions but you may starve them of new investment for a while as you direct future capital investment and focus new product sourcing decisions elsewhere.
Similarly, if you are in a supply chain that sells domestically but to firms that are engaged in EU trade, you may find a degree of uncertainty dampening your prospects over the period 2015-17. Finally, access to the wider continental pool of talent and skills might be affected adversely, as might access to finance, technology, products and services. These things happen at the margin but they can be sufficient to restrict the improvement in productivity that the UK economy needs.
More positively, with the UK economy stronger than the rest of the EU at the moment, local businesses that focus on local markets may not see much immediate impact. Others may start looking towards developing alternative markets outside the EU – some of which might be stronger growers (real and potential) than those in the European zone. Again, in the long run, shifting incentives may well mean short-term disruptions are self-correcting.
In summary, the non-political essence is that we can be
a) Optimistic about the long term, whatever the outcome of the referendum, because markets respond to new incentives and adapt accordingly, yet
b) Pessimistic about the short-term effects of the EU negotiation process, because of the uncertainty that it will generate.
The worry is that the immediate effects of the whole EU debate are to subdue demand and supply, restrict investment and innovation, and dampen productivity growth and real living standards. Herein, lies the immediate problem: economic growth is likely to be more sluggish than it might have been because productivity growth will continue to be restrained.
At this point in time, this means that most economic forecasts are rather subdued. Without a sharp recovery of productivity growth, it will be hard to sustain an upturn above a modest rate. Without knowing any detail of the in/out alternatives (perhaps a ‘story’ to come), the policy hurdles ahead will tend to suppress the outlook from what it might have been.
Professor Nigel F Jump, 10th June 2015
