The economy: Expectations and narratives matter

Businesses should plan for the reality, not the general mood.

Today the North East Local Enterprise Partnership (LEP) held its annual Our Economy event to discuss North East economic prosperity and the cost of living crisis.

Kitty Ussher, Chief Economist at The Institute of Directors (IoD), Mohammad Jamei, Director of Economic Projects at the CBI and Mike Brewer, Deputy Chief Executive of the Resolution Foundation joined Richard Baker, Strategy and Policy Director at the North East LEP, to discuss income trends, investment, business growth and employment.

It was a sobering event. Each of the speakers pointed to a recession that will last most (if not all) of 2023, with a tight labour market, rising unemployment and falling income creating hardship.

As Brewer pointed out, the rising price of energy makes us all poorer and there is no agreement yet on who should pay for this.

Brewer also noted that all the ways in which households have been supported to date (such as council tax rebates, cost of living payments, the £400 energy bill rebate etc) will come to an end in April. 

Offering a small amount of consolation for homeowners - if not savers - was agreement from Jamei and Ussher that the Bank of England has signalled that interest rates are unlikely to rise in the way projected by the markets.

There was also some useful information to help with strategy planning and resilience.

According to the IoD’s data, business leaders expect inflation to peak in Spring 2023 and bosses should plan for this accordingly.

With SME order books flattening, Ussher reported that the top five business worries right now remain:

1.     UK economic conditions

2.     Cost of energy

3.     Global economic conditions

4.     Skills shortages

5.     Trading relationship with the EU

However, while business optimism was hit badly in October due to a combination of political instability and inflation, the Institute’s entrepreneurial membership continues to plan for growth.

There was an interesting debate about whether the media are denting business confidence by talking things down. Kitty Ussher had some sound advice for this too. Her recommendation was to ask the following questions in the boardroom:

1.     To what extent are we being affected by the mood, not the reality?

2.     How are competitors thinking and feeling?

3.     Has it become harder to pass cost increases through as people expect inflation to fall back?

4.     Do our staff feel confident or cautious about their position in the labour market?

5.     Have we planned for a lower interest rate environment as well as a higher one?

It’s clear that 2023 will offer many challenges but every single panellist added that it may not be as pessimistic as it first seems.

Public finances appear much worse because the economy has shrunk, but the Chancellor has a number of ways in which to respond. We’ll know more following the Autumn Statement on 17th November.

You can get a copy of the North East LEP’s Our Economy report here.