Published Thursday 7th February 2019
The UK economy is in a period of severe turbulence. The IHS Markit/CIPS purchasing managers’ index (PMI) reported that the UK’s service sector all-but stagnated in January, with new orders falling for the first time in over two years. Often seen as a key indicator to the national economy, the score of 50.1 – with 50 equating to no growth – is down on December’s 51.2 and shows no clear sign of improving. The figure leaves the UK at the precipice of an economic decline heading into the end of Brexit negotiations with the EU.
As with other national figures from the last twelve months, Brexit is a key reason behind these service statistics. However, this recent survey also sought to point out the wider economic picture. Led by the two largest contributors, many forecasters are expecting the global economy to slow during 2019. With EU negotiations reaching their conclusion, this news could have a significant impact on British business.
The Chinese Financial Challenge
Traditionally, the United States of America dictates the direction of the global economy. However, in the modern world, there is a second major power whose impact is equally broad. Over the last 40 years, the Chinese economy has developed at a rate never seen before, averaging 10% growth per year. By comparison, the American economy has grown by around 2% yearly on average during this decade. Fuelled by state-backed manufacturing and a strong export market, China has firmly established itself as the second-largest economy in the world.
During this remarkable growth, large swathes of China’s population have been lifted out of poverty. The country is now regarded as an ‘upper middle-income country’ by The World Bank, and an increase in disposable incomes has opened up new pathways for the Chinese economy. For many years, China has signalled a desire to move from a producing economy to a consuming one, promoting private sector business and luxury goods. A robust private sector will help secure the future Chinese economy, supplying jobs and helping to clear mounting national debts. However, such a change is not easy, and the side-effects are now evident.
The Chinese economy has gradually slowed since 2007 as these structural changes have taken place. This has eventually led to an annual growth of 6.6% in 2018 – a high score on the international stage but China’s lowest since 1990. This slowdown has curbed Chinese commercial enthusiasm, particularly in its undeveloped luxury goods sector that had attracted major names from across the world. Many carmakers have quoted slowing demand in China as a reason for lower profits, whilst Apple also declared disappointing sales primarily caused by the Asian superpower.
Another widely reported aftereffect of the Chinese changes has been the recent trade war with the United States. Alienated by the rising superpower and its unique business regulations, the US Government have sought to force changes from the Asian country by imposing tariffs on their crucial exports market. With both their age-old and brand-new economies under fire, China is expected to struggle, especially for the first half of 2019. This trade war has affected America, too, with the superpower already predicting slower growth this year than previously.
An Uncertain Future for UK Business
Slower growth in China and America will dictate the future direction of the world economy, and there is evidence that the slowdown is already having an impact closer to the UK. The eurozone showed a substantial slowdown in the third quarter of 2018 which appears to have continued into 2019, whilst there are fears that Italy could be on the verge of another recession. This uncertainty may not lead to the severity of the 2007-08 financial crisis, but the clouded outlook will do little to improve business confidence.
This economic downturn could not have come at a worse time for the UK. Brexit has weighed heavily on British business, with a combination of plummeting business leader confidence and reduced consumer spending leaving the economy at a standstill. The wider economic downturn will only make business harder for major companies that are already trying to contend with severe market difficulties.
While some analysts are hoping for a clearer outlook during the second half of 2019, for many the need to act now is paramount. With a short-term economic picture less clear than it has been for many years, UK businesses are turning to procurement companies such as ERA to help secure profits through this challenging period.
Here at ERA, we have been helping major UK businesses streamline their supply chains since 1992. Our specialists have years of experience in a range of cost sectors, working with you to refine your procurement strategies for the long-term. In this turbulent economic period, reducing your expenses will help to support your business going forward, so why not get in contact with us today?