The UK economy is in a lot better shape

Britain has avoided a widely expected recession so far. The UK business world is signaling the economy may hold up better than feared, according to a veteran Schroders fund manager.

UK GDP fell 0.53% in December, after shrinking 3.7% in the last three months of 2022 to avoid a technical recession.

The Bank of England predicts that the British economy will enter a small recession in the first quarter of 2023. It will last for five quarters. This is due to high energy prices and rising economic interest rates.

There’s hope on the horizon

Andrew Brough, Schroders head of small and mid-cap European stocks, said businesses seem more resilient than ‌GDP and official forecasts suggest.

Brough advised the market not to view this as a sign that tightening financial conditions increase default risks among UK consumers. He said the companies he was talking to were operating effectively.

Since 2016, uncertainty about the relationship between Westminster and Brussels has affected business investment. This has hindered productivity growth, added to Brexit-related costs, and made potential UK growth harder.

Real business investment will only increase slightly in 2022, compared to before the Brexit vote. However, recent trends are more promising.

Pickering also emphasized that UK businesses lack loyalty rather than opportunity. Non-financial corporations stand on deposits equivalent to 23% of annual GDP. The debt of non-financial corporations is also low. Debt is 75.5% of GDP by 2022, which is lower than the GFC peak of 105% in 2009 and the current 146% for the Eurozone.

With business investment accounting for around 10.4% of UK GDP, a return to pre-Brexit vote growth rates of 5.54% could add 5 to 6 percentage points to annual GDP increases over the next year, Berenberg predicts.