Economic Summary June 2019

Following our attendance at a seminar hosted and sponsored by FRP Advisory on 5th June, we have provided a summary of the economic update provided by the Bank of England. Along with a small business summary presented by FRP Advisory.

Key takeaways

– UK growth has slowed with stable consumer spending and inflation being driven by rising wages
– 40% SMEs still have no cyber security plan
– Outside London house price growth is stable but transaction times are longer
– Brexit stockpiling continues following increase in Q1 despite warehouse shortages
– M&A activity growing as owners seek an exit before Brexit
– Wages are rising and with 40 year low unemployment recruiting is increasingly difficult

Summary point

Bank of England are taking the view that to grow sustainably you need to increase productivity

Economic Summary

Provided by Andrew Holder from the Bank of England (https://www.bankofengland.co.uk/)

Economic Growth

– GDP project to grow at 0.2%
– Stock/provision building artificially inflated growth for 2019 Q1
– Slow UK growth attributed to reduced investment spending and slowed global growth

UK Economic Impact

– Exporting is becoming increasingly difficult due to uncertainty and FX rates
– Consumer spending remains stable
– Salary growth is leading inflation
– Generally pessimistic view around the direction of the UK economy

House Prices

– House price growth has slowed but remains stable with transactions taking longer
– Developers are incentivising buyers to move stock
– London market is in negative growth at the top end

Employment and Productivity

– Unemployment at 40 year low (4%)
– Increasingly difficult to recruit as labour shortage increases
– UK productivity is amongst the lowest in Europe with low growth
– Wage inflation has stabilised but is still impacting costs due to low productivity
– Bank of England taking the view that to grow sustainably you need to increase productivity

GDP Growth Projections

– Hugely uncertain due to Brexit but projected growth is likely to be 1-3%, this assumes that we leave the EU with a deal
– Worst case scenario of leaving with no deal could trigger a recession
– We have seen 10 years of uncertainty and the markets have adjusted, the only consistent change is the source of that uncertainty
– Inflation likely to remain at around 2%
– Interest rates will remain at around 1-1.5%

Trends Impacting SMEs

(provided by https://www.frpadvisory.com/)

Financial Trends

– May 2019 saw more profit warning than any month since the recession (highest in 10 years)
– History tells us when PLCs suffer the SME market is hit next
– 50% of CFOs report that spending on recruitment and CAPEX is down due to multiple factors: Brexit/exchange rates/pension enrolment/minimum wage/digital VAT/business rates/apprenticeship levy

Recruitment Trends

– Wages are being lifted just to retain staff
– Despite increasing wages 2/5 businesses can’t retain their people
– Low female representation in the senior team is damaging company reputation

Cyber Security

– 1/3 of SMEs still have no plan
– 40% have no employee cyber security policy
– 70% have no datacentre policy
– SMEs are not understanding long term cost/benefit of investing now

Brexit Stockpiling

– Stock piling is increasing over the next 6 months following an increase in Q1
– Lead times on inbound containers is already high
– General warehouse shortage across the UK and especially the South East
– 38% are not talking to their banks about to create a stockholding policy

M&A Activity

– Technology and healthcare are key activity sectors
– UK outperforming global M&A growth activity with strategic transactions media, telecoms and pharmacueticals.
– South East is the most active sector outside London with more deals but of lower value
– Private equity funds are looking for investment opportunities; technology and disruptive businesses are prime targets

Exit Strategies

– Business owners are rushing to sell due to Brexit
– Entrepreneurs relief is likely to be cut because it currently costs the government £3.9bn and only benefits 5,000 people
– Increasing trend for 2-step exits

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