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Economic outlook for 2016: the curate's egg

UK business leaders will need their wits about them in 2016 as economic developments play out

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With the introduction of a National Living Wage and an EU referendum looming, IGD's Chief Economist James Walton provides a run down of the latest economic developments and what impact they could have on the UK.

At the time of writing (January 2016), the news agenda seems dominated by gloom and much of this is rational; it is hard to deny that strategic risk is severe and uncertainty is high.

However, the situation is more nuanced (and less gloomy) than the popular media suggests. There are reasons for optimism, although much skill – and a lot of luck – will be needed to avoid the worst outcomes.


On the downside China seems to be slowing far more quickly than its government intended; Chinese asset prices have been hit hard and other, non-Chinese markets have been impacted.

Falling demand for materials and fuel – coupled with currently abundant supply – has driven down global prices and there is little prospect of a quick recovery. Shipping prices (e.g.: Baltic Dry Index) are also at record lows.

Low prices are bad news for exporters such as Brazil and Russia and as there are more importers than exporters, shoppers in importing markets (e.g.: UK, USA) are benefiting from reduced inflation.

Geopolitical risk remains high, with key variables such as conflict in the Middle East/North Africa and the future of the EU meaning institutions are under unprecedented stress at present.

Overall, though global growth is lacklustre at present, we can identify areas of improvement.

As emerging markets slow, the USA and Western Europe seem to be regaining traction, albeit slowly.

Although no one would describe what is happening as a consumer boom, unemployment is falling and shopper demand is returning – though much of this is built on rising population rather than higher per-capita purchasing.

The challenge for European governments now is to try to build momentum and create lasting recovery, whilst addressing long-standing economic issues (e.g.: poor productivity, sovereign debt) and constitutional stresses.


In the UK, the current strategic position is, apparently…OK.

In the last year or so, economic change has remained generally positive, from a shopper point-of-view, with UK consumers benefiting from:

  • Low interest rates
  • Rising wages
  • Higher house prices
  • Weak inflation

Most of these trends seem likely to remain in-place for some time, although there were signs of a slow-down in wage growth towards the end of 2015.

It is not yet clear whether this represents a new trend or whether it reflects employers preparing for the arrival of the new National Living Wage (NLW) in April 2016 – note that the slowdown predates the announcement of NLW.

Increasing global risk remains a concern and may explain why key influencers such as George Osborne and Mark Carney have been noticeably more downbeat in 2016 than they were in 2015.

National Living Wage

The NLW, coupled with changes to the tax regime, is expected to deliver significant improvements in personal prosperity for millions of UK employees.

NLW and workplace pensions are currently being advertised on TV so as well as higher disposable incomes, consumer confidence should also increase.

For many businesses, the arrival of NLW may be expected to boost demand, but the benefit of this must be balanced against a likely increase in employment costs, especially in labour-intensive activities.

Food and drink businesses have responded in various ways. Some, like Starbucks and Sainsbury’s have said there will be little impact. Others have gone on the record to raise concerns.

In or out?

The other key uncertainty businesses are currently considering is the UK’s position within the EU – the “Brexit” issue.

Polling shows that the pro- and anti-EU camps in the UK are currently neck-and-neck, although a sizeable number of voters remain undecided and the outcome of the referendum is hard to call.

We don’t yet know on what terms the UK might leave the EU or, indeed, stay in. Assuming that the UK does vote to leave, it will likely take many years to achieve a break. This would mean, at best, an extended period of confusion and uncertainty, for government and businesses.

With both the NLW and possible Brexit to contend with, UK business leaders will need their wits about them in 2016.

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