UK Economy: Boom or Bust?

it's easy to dismiss the UK economy as a basket case on one hand you have the government telling us that the economy is in an awful State and that we're in for a rough ride but on the other there have been some promising signs in this video I look at the data to see the true picture and tell you whether I think we're headed for a boom or a bust today's video is sponsored by trading 212 a UK commission-free investment platform a fairly good barometer for the UK economy is its currency and that reacts very quickly to economic news and we're now recovering from a shock which was the covid pandemic and of course the mini budget which was self-inflicted so if you look at the value of sterling versus the dollar or the Euro we're now pretty much back where we were before that double shock so now let's go through some of the macroeconomic indicators to see where we stand right now let's start with GDP now if we look at quarter on quarter changes in gross domestic product in the UK you can see these two time periods one before the pandemic one after and before the pandemic quarterly growth was around 6 to 8% every quarter if you annualize that you simply multiply roughly by four but then we get to the point where we switched off the economy and switched it back on again you have this huge downswing in GDP and a huge upswing and only now have we got over the after shocks and back to somewhere like where we were previously so for the first two quarters of 2024 you can see growth has been pretty good in the UK courtly growth was 6% then 7% another way of looking at that is to see where we are relative to the level of GDP before we had the pandemic and if we compare us with the United States for example you can see that their fiscal stimulus was much bigger and it actually stimulated more growth so their recovery has been much larger than that of the UK whereas their growth is actually faster than it was before the pandemic ours seems to have stuttered a little bit and taken time to get going again but notice that there is that inflection point at the very end of the graph and that is promising a useful forward-looking measure of growth is to look at the purchasing managers indices and these are published by S&P Global and here it is for the UK now this is a FL PMI not all of the data is in yet but it was published very recently as I made this video about a week ago the PMI index is above 50 if we expect expansion and Below 50 if we expect contraction in business notice that that correlates pretty well with GDP which is the gray bars that you can see overlaid on this graph and at the moment that blue line the PMI index has been above 50 for some time in fact it's been above 50 for the last 10 months months consecutively and if you read through that PMI report it's just good headline after good headline at the moment so Rising business activity and resilient demand conditions those are contributing to a greater uplift in staff hiring the rate of employment growth is the fastest since June 2023 survey respondents which are UK businesses also noted that more upbeat assessments of the domestic economic Outlook had spurred efforts to boost business capacity and at the same time inflation pressures moderated across the private sector in August with input costs rising at the slowest Pace since January 2021 so UK businesses are more optimistic they're hiring and at the same time their input prices are no longer Rising rapidly so that means they could potentially have higher margins so certainly that paints a fairly Rosy picture looking forward for the UK economy so we've started the year well and also the Outlook looks pretty good and another good story comes in the form of inflation so here we've got two lines the blue line is the headline rate of inflation and that includes everything and then the yellow line excludes the volatile components which are food and energy now headline inflation was dragged down by lower energy prices that happened well before the core inflation rate started to fall and it's the core rate which central banks tend to focus on because that's more predictive of what happens in the future and and what's really reassuring here is that the core inflation rate is now starting to fall as well the worry was certainly from the central Banker's point of view that we'd get a wage price spiral as prices Chase wages and wages Chase prices that doesn't seem to be happening so this is good news from the bank of England's point of view and good news if you're a borrower in the UK because it means that rates are likely to fall further however what this doesn't mean is that prices will go back to where they were before this inflation Spike if we look at food prices for example you can see that they're about 30% above where they were in 2022 so for many people particularly the poorest households this Still Remains a really painful development and we'll see more about that later on today's video is sponsored by trading 212 a UK commission free investment platform that I use for my fund portfolio for example recently I've made a portfolio which tracks copper Miners and one of the things which makes trading 212 a great platform to do that is if I want to rebalance my portfolio I can do that at the click of a button and if I wanted to publish it for other people to see I could do that too furthermore I could look at other people's pies as they're called in order to see what they're doing with their portfolios and use that as inspiration for my own now one of the things which is a great idea when you're investing is regular saving and with the autoinvest feature for pies you can do that very easily now there's also a new feature on trading 212 where for US stocks of which there are over 5,600 you can trade even when markets are closed and trading 212 is called this feature 245 trading now you can still use the other features which trading 2m2 offers commission free trading and of course fractional shares and you can switch between that 245 trading and regular Market hours at any time now for graph viewers is a special offer from Trading 212 where you can claim free fractional shares worth up to £100 in order to claim that simply open up a new trading 212 account verify it fund it with at least a pound and then use our promo code which is my first name romen r a m i n or you can use the link in the description below now let's turn to unemployment now this is the proportion of people in the UK who are out of work but eligible for work and aged above 16 notice that it is increasing slightly to 4. 2% recently however compared to Historic Norms this remains very low so if you do want a job it's very likely that you can find one and that has all sorts of positive effects on the economy if you're confident about your job and the ability to earn then you'll be more confident about spending and particularly that applies to large ticket items so that means that companies Revenue will also benefit from that and it's good news for economic activity in the UK so that's a definite positive now there are two numbers here unemployment and inflation if you add the two together it creates What's called the misery index and certainly for the UK the misery index has come down a lot because unemployment remains low and inflation is now back to what it used to be before the spike now that's not true of everyone in the society and again more of that later but overall this is painting a picture that looks pretty positive for the UK now let's look at wage growth now what keeps Andrew Bailey awake at night well one of the things is going to be a price wage spiral the worry was that when prices increased people would simply demand much higher wages to keep in line with prices and that would create a kind of positive feedback loop where inflation carries on increasing however what we're seeing at the moment is that wage growth is starting to moderate nominal wage growth depending on whether you include bonuses or not that's come down to around 5. 4 to 4.

5% per year which is very brisk compared to averages in the past and even if we look at real wage growth that remains positive which is good news if you're an employee this is also good news from the bank of England's point of view because we can clearly see a Slowdown in the rate of wage growth so it remains positive in real terms good for workers and it's slowing down which is good news for for monetary policy and keeping inflation under control now one thing that worries some economists and certainly some politicians is the debt to GDP ratio so what this measures is the amount of outstanding UK debt that's a total amount that the UK governments borrowed relative to the size of the economy now the point at which people start to worry often is 100% And the UK is now at 100% debt to GDP however this graph goes back quite a long way in fact all the way back to 1900 and you can see that compared to where we were after the second world war that 100% debt to GDP Isn't So extreme now why is it so high well after the global financial crisis it increased and again after the covid pandemic we had to pay for things like Furlow schemes and that also pushed up the debt to GDP ratio so typically it's Wars things like pandemics which are very expensive where we really have to borrow more in order to spend and it takes a while for that debt to GDP ratio to fall again now if we compare the UK's debt to GDP ratio with other developed countries you can see that we aren't by any means the most extreme case that would be Japan there the debt to GDP ratio is 250% and it's been there for some time Italy the US France and Canada all of those have a higher debt to GDP ratio than the UK so personally I don't think this is particularly worrying plus it's clear that the government is very concerned about that Deb to GDP ratio and they will try to keep it at 100% or lower in fact their respect of those fiscal constraints may actually be a problem as we'll see so I don't want to appear too polanish let's turn to some of the problems that the UK faces I think one of those problems is very Stark inequality in the UK If you look at any measure GDP quality of life or life expectancy you see a very similar pattern where things are better in London and the southeast and not so good as you go further north or west so here for example you can see household income relative to the average so green is above average red is below average and it Compares where we were in 2019 with where we are now notice how things haven't got better better in fact things have got worse in terms of inequality now there have been various government efforts to try and redress that balance but so far they've been very unsuccessful so while I'm talking about the UK economy as a whole being okay for certain parts of the UK it's been incredibly tough and in particular if you look at the cost of living changes that we've seen due to the inflation Spike and break it down by impact across different income desiles so the bottom desile is the one on the far left of this graph and those are the poorest households and then the highest desile is on the far right notice how if you look at spending on things like housing food and energy it forms a much bigger proportion of household expenditure for the poorest families and inflation has really pushed up those prices so effectively it's hurt the people who are least able to weather that economic storm now the other structural problem long-term problem that the UK economy faces is weak productivity growth there are two ways to increase GDP one is to increase the number of people who are working the other one is to make each person generate more profit and higher income but if we look at UK real wage growth this is inflation adjusted notice how we're almost exactly where we were in 2008 so that means 16 years where real wage growth has only been about 1. 1% and that's 1. 1% overall so it's good that we are starting to see some real wage growth in the UK at last but that now has to redress the very long period the 16 years when we had almost no wage growth at all in real terms so how can we Kickstart growth again well it requires investment both by government and by businesses however if we actually look at business investment in the UK and compare it with the oecd which is effectively a group of rich countries across the world notice how in the UK we're well below the oecd average so the job of the government which I think will be very difficult is to break us out of this Doom Loop of low investment and low productivity growth however the new UK labor government has said that it's going to stick pretty much to the same fiscal rules as the conservatives had which is that over a 5ye period the debt to GDP ratio should fall so that means that effectively they got fiscal sh tackles which are going to restrict how much they can spend in order to stimulate growth however there is a bit of wiggle room because if you actually incorporate the amount of debt held by the bank of England and the losses on that debt as yields increased that should squeeze out about another 17 billion of wiggle room for the government to borrow but still I doubt that's going to be enough to stimulate much growth and to break us out of the Doom Loop and that just leaves raising tax taxes as the other way of getting money to stimulate the economy and that's never going to be politically popular personally I think that increasing the debt to GDP ratio to say 105% 110% would be absorbed by markets as long as they saw that there was fiscal responsibility at the end of the day and that the money that was being generated was being used to stimulate growth because that would tend to push down the debt to GDP ratio in the subse quent years now let's turn to the UK stock market again I think this is a barometer of how happy investors are with UK economy and what we're seeing for the large cap part of the market at least the footy 100 is new all-time highs now many of these companies are multinationals they're not based in the UK If we look at UK's small caps which are very much exposed to the UK economy there we're seeing pretty good growth as well certainly year to date those small caps in the UK have been doing well and personally I've got a UK small cap portfolio so I'm really hoping that continues so that's where we stand right now what does the outlook look like for the UK the blue line here shows you the level of UK GDP and notice how it can be split into three different phases one before the global financial crisis when the UK economy was growing about 2.

4% a year in real terms then we have the global financial crisis which really affected growth in the UK there we started to see Trend growth fall to 2. 1% so it never really caught up with its previous trajectory then we had the covid crisis and again it seems like that's really slowed down growth in the UK again now here's a forecast for UK growth from Nissa which is an institution which is pretty accurate historically at forecasting UK GDP as much as economists ever are and you can see big error bars here of course but notice how the central case is growth of around 1% per year now that's nothing like the 2. 5% we saw in the 60s it's not even as fast as we saw after the global financial crisis when growth was about 2.