British firms fear a threat worse than EU divorce

There may be a British royal wedding to bolster consumer spending, but most analysts are not expecting a joyous year for the UK economy in 2018. As the new year comes into focus, many in the City of London have decided that there is an even greater threat ahead than Brexit: a new Labour government.

“Businesses are always wary of a change of direction in government,” says Adam Marshall, director general of British Chambers of Commerce.

“There is real concern about nationalisation, very heavy regulation and massive tax rises, both on individuals and corporations,” he says.

Morgan Stanley told its clients that the prospect of a radical left-wing government, led by Labour’s Jeremy Corbyn, was a big risk for UK asset markets and advised against investing in companies that might be affected by policies including nationalisation and tighter regulation.

The US bank reckons there is a two-thirds chance of a snap election in the second half of 2018 once it becomes clear that the UK cannot secure the sort of Brexit deal it wants and the Conservative Party starts to fracture.

Morgan Stanley believes the prospect of a Labour government intent on raising taxes for the well-off and for businesses, nationalising the water companies, energy firms, postal and rail services is the biggest threat to the UK economy since the 1970s.

Even without political risk, the UK economy faces some major challenges.

“Too much of the post-2009 recovery has been built on debt and borrowing, which means future demand has been pulled forward and at some stage those loans will need to be repaid, which may dampen consumers’ contribution to growth, especially as the housing market is cooling,” says Russ Mould, an investment director at the investment services provider AJ Bell.

Another problem is that the UK government is already spending much more than it earns in tax.

Meanwhile, companies are reluctant to make capital investment or hiring decisions, given the uncertainty over Brexit.

Mr Mould thinks the pound now looks undervalued “so that should at least help exports but it is hard to see why growth should markedly accelerate in 2018 from the modest levels we have seen of late”.

JPMorgan, another US bank, is also predicting that while the eurozone will grow strongly, the UK will face specific headwinds that weigh on its progress.

“UK consumer confidence is likely to remain weak along with modest real income growth,” JPMorgan says.

Neil Wilson, a senior market analyst at ETX Capital, also predicts a lacklustre year: “I see the economy trundling along in 2018 – growth sub 2 per cent, but no nasty surprises. Global growth is strong and Britain can enjoy tailwinds but maybe isn’t able to exploit the benefits of that macro landscape like it might have done,” he says.

Households where finances are tight will also have a tough time, according to the Resolution Foundation, a left of centre think tank.

A Bank of England survey found the first rise in levels of financial distress among households in 2017 for four years, with more saying they expect their personal finance situation to deteriorate in 2018 than to improve.

“Households’ worsening personal finances and increased pessimism about Britain’s economic outlook suggest that the recent period of consumption-led growth may be running out of track,” says Matt Whittaker, the chief economist at the Resolution Foundation.

Even as wedding bells chime, there are tough times ahead.