WEEKLY COMMENT 4-01-2018
By Barry Edwards
A Warning for 2018/19
With most stock markets around the world at record levels and the majority of countries experiencing growing economies, looking forward over the next year, it looks very promising for the world economy. But somehow it does not feel like everyone is convinced that we are in a period of long-term growth and good fortune. In fact, many commentators and economists are uncertain how to predict the outcome of Brexit, the tax cuts in America and other life changing events occurring worldwide.
Looking at the medium term from a UK perspective for companies varies substantially depending upon which kind of business activity is being undertaken. Clearly, if you are dependent on mainland Europe for supplies and sales, it must be difficult to decide what to do now. However, if your business is not relying on the EU, the growth worldwide will be a big advantage in helping to improve order flow. This is the reason that we see the variety of responses to the research about Brexit and how it will ultimately affect the UK.
Reports from around the world reveal confidence has returned for those involved in commercial activity but it has not filtered down to all the employees, especially at the lower levels of responsibility. There has been a lot of research by the think tanks around the world exposing this inequality and the consequences that may result from it if it continues much longer. Therefore, it appears we have a situation where there is a lot of resentment about working opportunity and living standards generally which are beginning to be reflected politically.
Every continent around the world has been affected in some way by the financial crisis which has suppressed the reaction to lacklustre growth by many in societies worldwide. Now growth is returning to all regions of the world the divisions are being exposed and it has the potential to cause serious problems within all societies. In my view, this is where the real threat to world growth will come from and it is probably the reason that some people have doubts about the optimistic outlook for 2018.
Some economists are beginning to group together to look more thoroughly at the fundamental problems they see around them and are trying to devise better ways of analysing the economy. Current theory does not seem to provide the answers to controlling a rapidly changing business environment with technology progressing at the pace it is. Companies are developing their techniques to provide services and manufacture products which do not require as many staff; these days the more mundane work can now be administered by computer software entirely. This is forcing many people who used to work for these businesses into the position of having to find other jobs that tend to be part time and sometimes less rewarding. The benefits of secure employment are gradually being dissolved except for the largest companies.
What we have is a rapidly changing working environment that does not respond to the traditional methods of governmental influence to control the process creating an unfamiliar social experience that no one is quite sure how to manage. It leaves many people unsure about their role in life and not able to see clearly how their future will unfold. The classic comparison is the industrial revolution in the nineteenth century which transformed society but while it was happening it caused tremendous upset to the living standards of most people.
The current welfare system protects everyone from the worst effects of those times but while the change is taking place it can stimulate reaction against those that are better off and able to manage their affairs both socially and financially. We are beginning to see this in many nations worldwide and it could get out of hand if the politicians do not address this problem before the swell of resentment becomes uncontrollable.
This is what the forward thinking economists are trying to resolve but currently there is no framework for the politicians to implement to counteract the inequality problem. There are some things being done such as the gradual increase in the minimum wage to reduce the cost to the tax payer of making up the difference to a living wage. New laws are being introduced to provide some protection for those working in the new economy and minimum payment for those in contracted employment. This is all very new and is yet to be fully tested in the real world.
The structure of this new economy, especially for those without secure employment, is where the problems could occur if growth begins to fade away because of Brexit. Most of these new jobs have materialised during the last five years as the UK became the fastest growing economy in the developed world. That is now being reversed and if unemployment starts to rise the government may struggle to control the backlash while it seems to be solely concentrated on the Brexit negotiations. The political framework is particularly weak at this time which could lead to sudden change that nobody expected. This may send the economy into recession which almost certainly would lead to calls for an election.
The medium term outlook for the UK is uncertain in my view and events could unfold that no one has foreseen making life very difficult for government and the nation as a whole.
That’s all for this week, more observations next week.