Revised growth figures for the second quarter, out on Friday, show the UK economy was fit and well just before the referendum. And data on services output for July show Brexit had little immediate impact on that position, thanks to a strong pick up in retail trade. It now looks like the initial economic shock of the vote to leave the EU may be less severe than many predicted, with the impact taking longer to permeate the economy via falls in business confidence and investment.
However, the overall outlook for the economy remains significantly down on expectations prior to the vote. The chancellor therefore plays a crucial role in supporting the economy. As he prepares to address the Conservative Party conference on Monday, there are a number of areas where he could make a difference to the UK’s economic performance.
Faced with significant headwinds over the coming years, the chancellor could find it challenging to navigate the economy, balancing increasing demands and deteriorating public finances. In the short run, nothing much should change in terms of UK trading relations with the EU, and the main drag on the economy is likely to be uncertainty impacting on business confidence and investment. So while the UK government may not want to reveal its hand in regards to its position on trade negotiations, there are plenty of other areas where it can provide businesses with more certainty.
Starting with taxation policy, clients often tell us stability and simplicity are at the top of their wishlist. The chancellor could provide longer term guidance on where he expects business taxes to be heading.
Other areas where business is looking for clarity from the new government include its vision for infrastructure investment and regional policy.
Understanding the overall priorities and direction of the new government could greatly ease the current feeling of uncertainty for business. Waiting for the Autumn Statement to provide more guidance would leave companies in the dark for five months after the referendum results.
'Reducing uncertainty for businesses could go a long way to minimise the short term fallout from the Brexit vote, while measures to boost the UK’s flagging productivity are key to ensuring prosperity in the longer term'
Productivity has barely grown across the G7 since the Great Recession hit in 2008, and in the UK, productivity stalled largely across all sectors. This issue is particularly acute for the UK, as its productivity level remains significantly low, with only Japan below it in the G7 (see chart below). Compared with Germany, France, Italy and the US, ONS analysis suggests the main productivity underperformance to be of the UK’s private service sector, outside finance.
There is no single remedy to address this weighty issue, but clients have said they would like the chancellor to act in several areas: