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What is happening in the UK economy? A roundup

As we head into the last couple of months of 2021, the UK economy finds itself in a complicated position. Months of strong growth turned into something of a slow burner in the third quarter, as a combination of factors impacted the ability of economic activity to fully normalise.

Rising coronavirus cases, supply chain issues, problems in the labour market, inflationary concerns – the UK economy has its fair share of uncertainties to contend with as we head into the winter. Then, when you add in considerations related to Brexit, the outlook for the UK becomes complex. 

So, as Rishi Sunak announces a budget for the post-Covid economy, what should investors be focusing on? Let’s take a look at the key issues and the impact they might have in the coming months.

How is the UK responding to inflation?

For a few months now, inflation has been a chief concern for UK investors, central bankers and ministers alike. Inflation has been growing for most of 2021 thanks to global supply chain disruptions, surging energy prices and a rapid economic recovery from the Covid-19 crisis. 

Just last week, Bank of England chief economist Huw Pill predicted that inflation in the UK is likely to rise to “close to or even slightly above 5%.” In the same week, BofE governor Andrew Bailey took to the press to announce that the Bank “will have to act” against inflation. This means that rates in the UK are likely to rise soon, perhaps even this year. 

This comes at a tricky time for the UK economy. For investors, it’s an additional consideration on top of the supply chain issues and the disruption in the energy market. Any rise in rates could lead to a slowdown in the UK economy, too. It’s probably not a favourable environment for UK domestic assets, at least over the short term. 

What state is the job market in?

The UK labour market has been in a strange position lately. Much like the US market, employers haven’t been able to find workers, but the labour market still hasn’t recovered. UK job vacancies hit a high in September but the total workforce, though growing, was still some way off pre-pandemic levels. 

This combination suggested a mismatch between the demand for workers and their availability. This has been reflected in wage growth. At the end of September, Chancellor of the Exchequer Rishi Sunak ended the furlough scheme that had been in place for most of the pandemic. After all, demand for workers is high and wages have been increasing, so why pay to keep people out of the workforce? 

It’s still too soon to tell if the end of the furlough scheme caused any short-term disruption as we await the updated figures. There’s also a chance that the end of the furlough scheme will fail to solve skills shortages in the economy. For now, though, the government will be hoping to have fixed the disparity between supply and demand in the labour market, 

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What about the supply chain problems? 

Of all the issues affecting the UK economy at present, supply chain disruption has been the most visible. Anyone who owns a car will be all too aware of the queues at petrol garages earlier this month. 

There is a long list of contributing factors here. Plant closures in Asia, a surge in demand for things like exercise equipment and home entertainment, a labour shortage in agriculture and HGV driving – these are all playing a role and are likely to be with us for a while yet. Earlier this month, business leaders warned the UK government that the supply chain could be under strain into 2023, and that small businesses were likely to bear the brunt.

As for the impact on the economy, supply chain issues are likely to drive up inflation and to delay Boris Johnson’s “levelling up” agenda. Earlier in the year, businesses largely expected these issues to be transitory, but the prevailing opinion now seems to be that they’ll be with us for some time. This has contributed to inflation expectations as businesses attempt to pass some of the cost on to consumers. 

What’s going on with Covid-19?

The UK was relatively quick to remove its lockdown measures after what was a strong vaccination campaign against Covid-19. As a result, cases have grown as normal life has resumed, but there is still no suggestion from government that a move to ‘Plan B’ – the reintroduction of social distancing, working from home and mask-wearing – is imminent. 

Despite the high case numbers, deaths and hospitalisations in the UK have remained fairly consistent and are still nothing like the peaks seen in the previous winter. There have, also, been signs that cases in the UK could be set to fall dramatically thanks to a forecasted ‘endemic equilibrium’, at which point additional restrictions become unnecessary. 

For investors, it’s a case of wait and see. It does seem unlikely that businesses in the UK will be forced to close or have their revenue streams rocked by Covid-19 as they did during the lockdowns. At this point, the most relevant considerations for investors are the knock-on effects of the pandemic, like inflation and the job market.

As with everything impacting the UK at present, it’s useful to view these issues through the lens of Brexit. Labour shortages are some of the more direct knock-on effects of the UK’s withdrawal from the European Union, but issues with exports, for example, are taking their toll on the UK economy’s ability to recover. 

Of course, it’s difficult to fully identify the impact of Brexit given the enormity of the disruption caused by Covid-19, but we’re certain to develop a clearer picture going forward. Indeed, if you look at the Office of Budget Responsibility’s verdict on Rishi Sunak’s latest budget, Brexit features heavily as a hurdle both in terms of supply bottlenecks and productivity. 

For wealth managers like Moneyfarm, the key is to maintain a global, diversified approach to investing. There will be opportunities in the UK economy to balance the issues, but a fully diversified portfolio allows investors to observe developments from a position of relative comfort. If you want to find out what an actively managed, globally diversified investment portfolio could do for your finances, click the button below. 

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