UK Economy: Promising Signs Amidst Structural Challenges

The UK economy shows signs of recovery, but inequality and weak productivity growth remain significant challenges.

### The Current State and Future Outlook of the UK Economy
* 📉  It's easy to overlook the UK economy's complexities, with **contrasting messages from the government** regarding its health, yet some **encouraging signs are emerging**.
* 💷  The value of sterling has stabilized, returning to **pre-pandemic levels**, indicating recovery from the COVID pandemic and the mini-budget shock.
* 📊  Recent GDP growth rates show a positive trend, with quarterly growth reaching **6% and 7%** in the first two quarters of 2024, although the UK's recovery lags behind that of the **United States**.
* 📈  The Purchasing Managers' Index (PMI) remains **above 50 for ten consecutive months**, reflecting **rising business activity**, **increased hiring**, and **moderated inflation pressures**.
* 💼  While the unemployment rate has slightly increased to **4.2%**, it remains low historically, fostering **consumer confidence and spending**.
* 📉  The UK's debt-to-GDP ratio has reached **100%**, a level that raises concerns, yet it is comparable to other developed nations and not seen as **alarming**.
* ⚖️  Despite overall economic improvement, stark inequalities persist across regions, and the rising cost of living continues to **adversely affect the poorest households**.
* 🔮  Looking ahead, while growth is expected to be **modest at around 1% annually**, the outlook for the UK economy appears **stable**, barring any unforeseen crises.

it's easy to dismiss the UK economy as a basket case. On one hand, you have the government telling us that the economy is in an awful state and that we're in for a rough ride. But on the other, there have been some promising signs. In this video, I look at the data to see the true picture and tell you whether I think we're headed for a boom or a bust. Today's video is sponsored by Trading 212, a UK commission-free investment platform. A fairly good barometer for the UK economy is its currency, and that reacts very quickly to economic news. And we're now recovering from a shock, which was the COVID pandemic, and of course, the mini-budget, which was self-inflicted. So, if you look at the value of sterling versus the dollar or the euro, we're now pretty much back where we were before that double shock. So, now let's go through some of the macroeconomic indicators to see where we stand right now. Let's start with GDP. Now, if we look at quarter-on-quarter changes in gross

domestic product in the UK. You can see these two time periods: one before the pandemic, one after. Before the pandemic, quarterly growth was around 6 to 8% every quarter. If you annualize that, you simply multiply roughly by four. But then we get to the point where we switched off the economy and switched it back on again. You have this huge downswing in GDP and a huge upswing, and only now have we got over the aftershocks and back to somewhere like where we were previously. So, for the first two quarters of 2024, you can see growth has been pretty good in the UK. Quarterly growth was 6%, then 7%. Another way of looking at that is to see where we are relative to the level of GDP before we had the pandemic. And if we compare us with the United States, for example, you can see that their fiscal stimulus was much bigger, and it actually stimulated more growth. So, their recovery has been much larger than that of the UK, whereas their growth is actually faster than it was before.

the pandemic ours seems to have stuttered a little bit and taken time to get going again, but notice that there is that inflection point at the very end of the graph, and that is promising. A useful forward-looking measure of growth is to look at the purchasing managers' indices, and these are published by S&P Global. And here it is for the UK. Now, this is a FL PMI. Not all of the data is in yet, but it was published very recently as I made this video about a week ago. The PMI index is above 50 if we expect expansion and below 50 if we expect contraction in business. Notice that that correlates pretty well with GDP, which is the gray bars that you can see overlaid on this graph. And at the moment, that blue line, the PMI index, has been above 50 for some time. In fact, it's been above 50 for the last 10 months, months consecutively. And if you read through that PMI report, it's just good headline after good headline at the moment. So, rising business

activity and resilient demand conditions are contributing to a greater uplift in staff hiring. The rate of employment growth is the fastest since June 2023. Survey respondents, which are UK businesses, also noted that more upbeat assessments of the domestic economic outlook had spurred efforts to boost business capacity. At the same time, inflation pressures moderated across the private sector in August, with input costs rising at the slowest pace since January 2021. So, UK businesses are more optimistic, they're hiring, and at the same time, their input prices are no longer rising rapidly. So, that means they could potentially have higher margins. So, certainly, that paints a fairly rosy picture looking forward for the UK economy. So, we've started the year well, and also the outlook looks pretty good. Another good story comes in the form of inflation. So, here we've got two lines. The blue line is the headline rate of inflation, and that includes everything. Then the yellow line excludes the volatile components, which are food and energy. Now, headline inflation was dragged down by lower energy prices.

happened well before the core inflation rate started to fall, and it's the core rate which central banks tend to focus on because that's more predictive of what happens in the future. And what's really reassuring here is that the core inflation rate is now starting to fall as well. The worry was certainly from the central Banker's point of view that we'd get a wage-price spiral as prices chase wages and wages chase prices. That doesn't seem to be happening, so this is good news from the Bank of England's point of view and good news if you're a borrower in the UK because it means that rates are likely to fall further. However, what this doesn't mean is that prices will go back to where they were before this inflation spike. If we look at food prices, for example, you can see that they're about 30% above where they were in 2022. So for many people, particularly the poorest households, this still remains a really painful development. And we'll see more about that later on. Today's video is

sponsored by Trading 212, a UK commission-free investment platform that I use for my fund portfolio. For example, recently I've made a portfolio which tracks copper miners. One of the things which makes Trading 212 a great platform to do that is if I want to rebalance my portfolio, I can do that at the click of a button. And if I wanted to publish it for other people to see, I could do that too. Furthermore, I could look at other people's pies, as they're called, in order to see what they're doing with their portfolios and use that as inspiration for my own. Now, one of the things which is a great idea when you're investing is regular saving, and with the autoinvest feature for pies, you can do that very easily. Now, there's also a new feature on Trading 212 where for US stocks, of which there are over 5,600, you can trade even when markets are closed. Trading 212 has called this feature 245 trading. Now, you can still use the other features which

trading 2m2 offers commission-free trading and, of course, fractional shares. You can switch between that 245 trading and regular market hours at any time. Now for graph viewers, there's a special offer from Trading 212 where you can claim free fractional shares worth up to £100. In order to claim that, simply open up a new Trading 212 account, verify it, fund it with at least a pound, and then use our promo code, which is my first name, Ramen, R-A-M-I-N, or you can use the link in the description below. Now let's turn to unemployment. Now this is the proportion of people in the UK who are out of work but eligible for work and aged above 16. Notice that it is increasing slightly to 4.2% recently. However, compared to historic norms, this remains very low. So if you do want a job, it's very likely that you can find one, and that has all sorts of positive effects on the economy. If you're confident about your job and the ability

to earn, then you'll be more confident about spending, and particularly that applies to large ticket items. So, that means that companies' revenue will also benefit from that, and it's good news for economic activity in the UK. So, that's a definite positive. Now, there are two numbers here: unemployment and inflation. If you add the two together, it creates what's called the misery index, and certainly for the UK, the misery index has come down a lot because unemployment remains low, and inflation is now back to what it used to be before the spike. Now, that's not true of everyone in the society, and again, more of that later, but overall, this is painting a picture that looks pretty positive for the UK. Now, let's look at wage growth. Now, what keeps Andrew Bailey awake at night? Well, one of the things is going to be a price-wage spiral. The worry was that when prices increased, people would simply demand much higher wages to keep in line with prices, and that would create a kind of positive feedback loop where inflation carries on increasing. However, what we're

Seeing at the moment is that wage growth is starting to moderate. Nominal wage growth, depending on whether you include bonuses or not, has come down to around 5.4 to 4.5% per year, which is very brisk compared to averages in the past. Even if we look at real wage growth, that remains positive, which is good news if you're an employee. This is also good news from the Bank of England's point of view because we can clearly see a slowdown in the rate of wage growth. So, it remains positive in real terms, good for workers, and it's slowing down, which is good news for monetary policy and keeping inflation under control. Now, one thing that worries some economists and certainly some politicians is the debt-to-GDP ratio. So, what this measures is the amount of outstanding UK debt, that's the total amount that the UK government has borrowed, relative to the size of the economy. Now, the point at which people start to worry often is 100%. And the UK is now at 100%.

debt to GDP. However, this graph goes back quite a long way, in fact, all the way back to 1900, and you can see that compared to where we were after the Second World War, that 100% debt to GDP isn't so extreme now. Why is it so high? Well, after the global financial crisis, it increased, and again after the COVID pandemic. We had to pay for things like furlough schemes, and that also pushed up the debt to GDP ratio. So, typically, it's wars, things like pandemics, which are very expensive, where we really have to borrow more in order to spend, and it takes a while for that debt to GDP ratio to fall again. Now, if we compare the UK's debt to GDP ratio with other developed countries, you can see that we aren't by any means the most extreme case. That would be Japan. There, the debt to GDP ratio is 250%, and it's been there for some time. Italy, the US, France, and Canada, all of those have a higher debt to GDP ratio than the UK. So, personally, I don't

think this is particularly worrying. Plus, it's clear that the government is very concerned about that debt-to-GDP ratio, and they will try to keep it at 100% or lower. In fact, their respect for those fiscal constraints may actually be a problem, as we'll see. So, I don't want to appear too Polish. Let's turn to some of the problems that the UK faces. I think one of those problems is very stark inequality in the UK. If you look at any measure - GDP, quality of life, or life expectancy - you see a very similar pattern where things are better in London and the southeast and not so good as you go further north or west. So, here, for example, you can see household income relative to the average. So, green is above average, red is below average, and it compares where we were in 2019 with where we are now. Notice how things haven't got better, better. In fact, things have got worse in terms of inequality. Now, there have been various government efforts to try and redress that balance.

but so far, they've been very unsuccessful. So, while I'm talking about the UK economy as a whole being okay, for certain parts of the UK, it's been incredibly tough. And in particular, if you look at the cost of living changes that we've seen due to the inflation spike and break it down by impact across different income desiles. So, the bottom desile is the one on the far left of this graph, and those are the poorest households. And then the highest desile is on the far right. Notice how, if you look at spending on things like housing, food, and energy, it forms a much bigger proportion of household expenditure for the poorest families. And inflation has really pushed up those prices, so effectively, it's hurt the people who are least able to weather that economic storm. Now, the other structural problem, long-term problem, that the UK economy faces is weak productivity growth. There are two ways to increase GDP: one is to increase the number of people who are working; the other one is to make each person generate more profit and higher

income. But if we look at UK real wage growth, this is inflation-adjusted. Notice how we're almost exactly where we were in 2008. So, that means 16 years where real wage growth has only been about 1.1%, and that's 1.1% overall. So, it's good that we are starting to see some real wage growth in the UK at last, but that now has to redress the very long period, the 16 years, when we had almost no wage growth at all in real terms. So, how can we kickstart growth again? Well, it requires investment, both by government and by businesses. However, if we actually look at business investment in the UK and compare it with the OECD, which is effectively a group of rich countries across the world, notice how in the UK we're well below the OECD average. So, the job of the government, which I think will be very difficult, is to break us out of this doom loop of low investment and low productivity growth. However, the new UK Labour government has said that it's going to stick pretty

much to the same fiscal rules as the conservatives had, which is that over a 5-year period, the debt-to-GDP ratio should fall. So, that means that effectively they got fiscal shackles which are going to restrict how much they can spend in order to stimulate growth. However, there is a bit of wiggle room because if you actually incorporate the amount of debt held by the Bank of England and the losses on that debt as yields increased, that should squeeze out about another 17 billion of wiggle room for the government to borrow. But still, I doubt that's going to be enough to stimulate much growth and to break us out of the Doom Loop. And that just leaves raising taxes as the other way of getting money to stimulate the economy, and that's never going to be politically popular. Personally, I think that increasing the debt-to-GDP ratio to say 105%, 110% would be absorbed by markets as long as they saw that there was fiscal responsibility at the end of the day and that the money that was being generated

was being used to stimulate growth because that would tend to push down the debt to GDP ratio in the subsequent years. Now let's turn to the UK stock market again. I think this is a barometer of how happy investors are with the UK economy, and what we're seeing for the large-cap part of the market, at least the FTSE 100, is new all-time highs. Now, many of these companies are multinationals; they're not based in the UK. If we look at the UK's small caps, which are very much exposed to the UK economy, there we're seeing pretty good growth as well, certainly year to date. Those small caps in the UK have been doing well, and personally, I've got a UK small cap portfolio, so I'm really hoping that continues. So, that's where we stand right now. What does the outlook look like for the UK? The blue line here shows you the level of UK GDP, and notice how it can be split into three different phases: one before the global financial crisis when the UK economy was growing about 2.4% a

year in real terms. Then we have the global financial crisis, which really affected growth in the UK. There, we started to see trend growth fall to 2.1%, so it never really caught up with its previous trajectory. Then we had the COVID crisis, and again, it seems like that's really slowed down growth in the UK again. Now, here's a forecast for UK growth from Nissa, which is an institution that is pretty accurate historically at forecasting UK GDP, as much as economists ever are. And you can see big error bars here, of course, but notice how the central case is growth of around 1% per year. Now, that's nothing like the 2.5% we saw in the 60s. It's not even as fast as we saw after the global financial crisis when growth was about 2.1%. So, if this forecast is correct, that would be very poor growth indeed. So, in summary then, I think there are reasons to expect that things are improving. I don't think it's going to be a full-on

boom that we're going to see in the UK. I think it'll be a period of okay growth, which is a positive. Not having such high inflation is a huge relief, and assuming we don't see another crisis, I think it actually looks pretty good for the UK economy. However, we still have to address these structural problems, and it's still the case that many people in UK society are not feeling the benefits of growth. But are we going to see a bust in the UK economy? I think that's looking very unlikely, unless we have another crisis, of course. Now, don't forget our offer from Trading 212. In order to claim your free fractional shares, open a new account, fund it, verify it, and use the promo code my name, Romen. You'll also find a link to that in the description below. And as always, thank you for listening.

UK Economy: Boom or Bust?

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The UK economy has shown mixed signals, with the government warning of a rough ride while the currency and GDP are recovering from the COVID pandemic and mini-budget shock.

Quarterly GDP growth has been strong in 2024, but the UK's recovery has been slower compared to the US.

The purchasing managers' index (PMI) has been consistently above 50 for the past 10 months, indicating business expansion and providing a positive outlook for the economy.

UK businesses are experiencing the fastest employment growth since June 2023, driven by optimistic economic outlooks and moderated inflation pressures.

Input costs are rising at the slowest pace since January 2021, potentially leading to higher profit margins for businesses.

While core inflation is now falling, food prices remain significantly higher than in 2022, causing ongoing challenges for the poorest households.

Commission-Free Trading and UK Economic Overview

Trading 212 offers commission-free trading and fractional shares, with a special promotion for free shares worth up to £100.

The UK's unemployment rate has slightly increased to 4.

2% but remains low compared to historic norms, positively impacting economic activity.

Wage growth is moderating, with nominal growth around 5.

5% per year, and the UK's debt-to-GDP ratio has now reached 100%.

UK's Debt to GDP Ratio and Economic Inequality

The UK's debt to GDP ratio has increased since the global financial crisis and COVID pandemic, but it is not the most extreme compared to other developed countries.

The UK faces stark inequality, with worsening household income distribution and a higher impact of inflation on the poorest families.

Additionally, the UK struggles with weak productivity growth, which is a long-term structural problem for the economy.

Real wage growth in the UK has been stagnant for 16 years, with only a 1.

Business investment in the UK is below the OECD average, making it challenging for the government to stimulate growth.

The new Labour government plans to stick to conservative fiscal rules, with limited wiggle room for borrowing, while raising taxes to stimulate the economy may not be politically popular.

UK growth has struggled since the global financial crisis, with a current forecast of around 1% per year.

This is a significant decline from the 2.

While there are signs of improvement, structural problems remain, and many in UK society are not benefiting from the growth.