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The UK economy - defying the odds?

Despite doom-and-gloom predictions, the UK economy seems to be in good health.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

With the ongoing Brexit uncertainty dominating the news, it’s easy to lose sight of what’s actually going on in the UK economy. And ultimately it’s the economy that impacts us the most over the long term.

A booming economy might see bigger tax receipts for the government, giving them room to spend more on things like public services. A struggling one could see rising unemployment, increasing the proportion of the budget spent on welfare.

So how are we doing?

Despite the predictions of many, including former chancellor George Osborne, of the economy getting worse, the UK economy’s continued to churn out some impressive numbers.

The government recently announced that wages are growing at an annual rate of 2.7% above inflation, the fastest we’ve seen since before the financial crisis.

And this is what we really notice and care about. Having more money in our pockets at the end of each month. It lets us spend more on goods and services, fuelling businesses and our economy and creating a virtuous cycle.

Record employment rates

Another source of encouragement is the number of people in work and paying taxes.

The employment rate has recently hit 76.1%, the highest level on record. And it shows. The government’s income tax receipts increased for the seventh year in a row last year.

UK employment rate (%)

Scroll across to see the full chart.

Source: Office for National Statistics (ONS), 28/03/2019

Over in number 11 Downing Street, this is great news for the chancellor. Higher tax receipts and lower welfare payments  means a narrowing budget deficit, giving the government coffers a welcome boost.

This could be important in giving Mr Hammond just that bit more wiggle room to support the economy if a no deal Brexit materialises.

Something likely to be high on his list of priorities. The government estimates that a no deal could lead to the UK economy contracting 9% over the next 15 years. 

We’re not trying to predict where we’ll be in 15 years. But whatever you think about Brexit, more people in jobs today can only be a good thing.

The clouds still remain

While the economy looks healthy, business confidence has fallen to the lowest level since the referendum.  It’s suffering with the uncertainty created by Brexit, and the prospect of a no deal outcome is hindering decision making.

There are some concerns that the service sector could be slowing down after it shrunk for the first time in three years in March. It will become clearer over the coming months whether this is a trend or just a symptom of the political chaos in the month the UK was supposed to leave the EU.

Some are worried that businesses are simply hiring more workers to meet demand  rather than investing in big projects. This means the employment statistics look great. But it could lead to longer-term issues in the future if they haven’t invested enough today.

The Brexit dividend

Until the terms of the UK’s departure from the EU become clearer the uncertainty, and reluctance of businesses to invest for the future, is likely to continue.

But there’s also the promise of a ‘Brexit dividend’ by Phillip Hammond  if the UK leaves in an orderly manner.

It will be spent on improving public services using the money that some have claimed we’ll save from no longer contributing to the EU budget, along with the improvement in government finances.

It’s a tempting prospect, and something that might sway MPs when voting on any Brexit deal.

What does all that mean for investors?

The drawn out negotiations and the uncertainty that's been created has left the UK stock market unloved, with a lot of the downside priced in. This could offer a great investment opportunity, but investments can fall as well as rise in value, so you could get back less than you invest.

Even the FTSE 250, which tends to be more focused on growth and is more exposed to the UK economy, currently yields an attractive 3.2%. Remember yields aren’t a reliable indicator of what you’ll get in the future, and there are no guarantees the market can’t fall from here.

Ultimately no one knows what the outcome of Brexit will be yet. But if you’re confident in the UK’s prospects you might want to take a look at domestic-focussed businesses.

Sectors like housebuilders and banks have struggled with valuation lately, and these kind of businesses are sensitive to the UK economy. If things go well they could see a turn in share prices, although the opposite is also true.

Discover our UK fund ideas on the Wealth 50

Get a head start

Take advantage of the new ISA allowance. Find out more about ISAs.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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