Economic Health Check: UK

The UK, entwined in the narratives of Brexit, Covid, Ukraine War, Inflation, Recession, and Immigration, is facing a profound impact touching every facet of its society and business landscape. In this article, we aim to decipher the intricate patterns that define the present and leave you thinking of the potential trajectories that lie ahead.

Historically, the UK economy has been renowned for its robust financial, service, and retail markets, with manufacturing, tourism, and education contributing significantly to its global perception. However, since Brexit, a lot has changed, intriguing us to examine economic statistics and understand its current trajectory.

Let’s commence with the classic GDP metric!

Source: ONS – The graph above contains the chained volume indices of gross value added estimates of Monthly GDP and its main sectors: Production, Services, Construction and Agriculture. These figures are seasonally adjusted, with a reference year of 2019 (2019 = 100).

According to the ONS stat above, the services sector and monthly GDP have been perfectly aligned since 2018. While 2020 proved challenging globally, not just in the UK, the agriculture and production sectors appear to have stagnated at pre-Covid levels. In contrast, construction and services sectors seem to have plateaued at their pre-Covid peaks. These trends are justified by the recovery in investments and demands in 2021-2022 followed by the challenges posed by the Ukraine war in late 2022.

Another crucial metric for assessing an economy’s health is monitoring investment within the country’s businesses. Let’s examine how this investment activity has evolved.

Source: ONS – Business Investment Data released on 22nd December 2023. The chart above shows annual growth in Chain Volume Measure (CVM) of business investment. CVM is considered more aligned since it includes compounding effect of historic prices and volume which seems a little better metric than looking at current price levels of those investments.

From the above stat, a clear positive growth in investment is evident. The market sentiment from an investment standpoint is optimistic, with numerous businesses eyeing IPOs, strategic M&As, and PE houses seeking quality investments. The factors contributing to this positivity are linked to stabilizing interest rates, as discussed in previous articles, coupled with the BoE and ECB holding rates, with possible future cuts.

While in the realm of investments, let’s also scrutinize FDI data and interpret what global markets believe is the UK’s potential.

Source: ONS – FDI Investments (figures in GBP)

The FDI data within the UK has gradually increased since 2016, while outbound investments have somewhat stagnated. Speculation arises – are global markets viewing UK assets as cheaply valued, leading to a ‘buying the dip’ trend? Moreover, could UK investors or businesses be retaining money within the economy, given the stagnation in outbound FDI? While speculative, a reduction in outbound FDI could potentially boost the domestic economy in the coming years. On the flip side, an increase in FDI into high-growth emerging markets could help the UK earn high ROI. A win-win either way!

Turning our attention to unemployment and wages – crucial elements shaping any economy’s future.

Source: ONS – data adjusted for seasonality
Source: ONS – data adjusted for seasonality
Source: ONS – data adjusted for seasonality

In the charts above, weekly wage growth appears to have peaked and is on a downward trajectory since 2023. The unemployment rate, relatively stable since 2017, reveals a U-shaped curve when traced back to the year 2000. The critical metric to watch this year is the unemployment rate, potentially dictating whether a recession is unavoidable for the UK. The trend seems upward, reminiscent of the 2008-09 peak. Flattening or lowering this curve would be significant good news for the UK.

Finally, let’s examine the CPI data for inflation.

Source: ONS

Inflation has seemingly fallen and is almost in line with G7 countries. Rate hikes appear effective, but it remains a wait-and-watch scenario, as inflation might reverse if other metrics spiral out of control.

In this economic health check article, there is reasonable evidence to suggest that the UK is at a critical phase. Continued efforts to control inflation, maintain acceptable interest rates, and generate high-return assets from investments will define the country’s recovery.

I hope this information proves useful and provides a concise summary of the UK economy. Stay tuned for more articles!

Disclaimer: The information provided in this article is for informational purposes only and should not be considered as financial or investment advice. The content reflects the author's views at the time of writing, and economic conditions may change. Readers are encouraged to conduct their own research and seek professional advice before making any financial decisions. The author and publisher are not responsible for any actions taken based on the information in this article.
MSc Finance graduate from the London School of Economics and Political Science (LSE)
Avatar for Ria Vaghela

Ria V Vaghela is an M&A Executive at RSM UK and an MSc Finance graduate from the London School of Economics and Political Science (LSE). She has worked at Jefferies, Dial Partners and 7i Capital prior to RSM UK gaining an experience of about 1.5 years. She has also worked as an Editor and Content Writer for The Representative Media. Apart from finance, she is interested in reading books on psychology and economics and also likes to paint and play lawn tennis

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