The global economy hasn’t faced this much uncertainty since the Second World War, according to Times columnist Oliver Kamm; the economic model that has driven growth for more than 60 years is coming close to breaking up.
“Trade has been tremendously important for the global economy, particularly for the UK, as we are such an open economy,” he says. “All of this has been put into doubt by seismic political developments in the past year.”
Despite this uncertainty, Kamm sees some clear possibilities for what might happen over the next couple of years.
The UK may follow the Swiss model
Having left the single market, the UK will probably follow the Swiss model, which is based on bilateral deals with the EU for different business sectors. But, while this system might work for tangible goods, says Kamm, it might not for financial services. “They’ve got plenty of bilateral deals in trading goods, but they haven’t got deals in trading services, and this is something that’s also going to hit the UK if we don’t manage to negotiate a favourable deal with the EU. And not just financial services, but also creative, digital, biotech – things we’re very good at that will ideally power the UK economy in years to come. We need access to sell our expertise.”
Expect inflation to start biting
Britain, Europe and Japan are all feeling the effects of currency depreciation against the dollar, which will push inflation in the UK. “Inflation is going to be picking up well above the Bank of England’s targets at the same time as nominal wages are going to be very restricted,” says Kamm. “We’ve had a couple of years when nominal wages outstripped prices but that’s going to be reversed quite sharply over the medium term, and people are going to get poorer.”
Businesses will innovate
As in the US and the UK that emerged out of the Great Depression, rising inflation and stagnant growth could encourage companies to think more creatively about how to improve productivity. “An imaginative approach of trying to boost margins at a time of weak sales volumes is going to take a lot of thought and expertise in British industry. They’ll need specialised professional services to help them along the way,” says Kamm.
SME-sector growth is unlikely to slow
“I don’t want to imply it’s too rosy a picture, because, while the labour market is very close to full employment, some of these jobs can’t be paying very well,” explains Kamm. “But my interpretation is that there are a lot of entrepreneurs and self-employed people who are taking risks and trying to establish themselves.”
Big businesses are likely to sit it out
There are signs that larger companies are stockpiling cash, which suggests many will stop investing for the foreseeable future, because demand is currently difficult to predict. “It’s very difficult to scale back investment once you’ve started,” says Kamm. “That, I think, is going to be a prominent theme in the economy next year. But, for smaller companies, which can define their market more precisely, I think there’s an opportunity for them to take market share just by doing what they’re doing [now] and doing it well.”
The UK won’t become a tax haven
“I think it’s impossible to foresee the 27 EU negotiating partners looking kindly on the UK if we cut corporation tax. It seems to me to be very unlikely to work as a strategy outside the EU, because the companies that we’d be seeking to attract – big, international companies – are not really driven by the corporate tax rate. They’re driven by the ease of doing business, access to markets, and so on,” says Kamm. “The big thing that will matter for most international companies is: can they sell into Europe?”
This article first appeared in the March/April issue of Accounting Technician.
Mark Rowland is the Editor of Accounting Technician.