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Abu Dhabi, UAEMonday 10 December 2018

UK's turbulent year draws to a close with little to cheer

In the maelstrom of the Brexit negotiations, British companies have been having a harder time than most international peers

British prime minister Theresa May arrives for the EU summit in Brussels, Belgium. Eric Vidal/Reuters
British prime minister Theresa May arrives for the EU summit in Brussels, Belgium. Eric Vidal/Reuters

Almost at the 11th hour, the UK’s prime minister managed to achieve her first Brexit breakthrough. As the end of the year raced into sight, the EU finally confirmed that it will allow the UK to move on to trade talks. With the question of citizens’ rights, the divorce bill and the Irish border apparently settled, talks can now begin on what the UK’s future relationship with the EU will be.

However, that could not mask the fact that UK companies have been having a harder time than most international peers.

"The UK market provided reasonably solid returns in 2017, once dividends are taken into account. However, those returns paled compared to what was on offer in Asia, Europe, Japan or the US,” Russ Mould, investment director at wealth manager AJ Bell, tells The National.

Immediately after the Brexit referendum in June last year sterling’s value plunged, which was great news for the biggest companies on the UK stock market as many make their money overseas.

That situation has corrected this year as the pound has rallied.

London’s biggest companies look likely to end the year up around 4 per cent, which is nowhere near as emphatic a performance as either on Wall Street – where the Dow has been up as much as 23 per cent or in the euro zone, where the DAX has seen recent highs of 15 per cent on the year to date and the French CAC40 is up around 11 per cent.

“I think the real challenge is the lack of buyers for British stocks that's led to some pretty huge falls in a number of blue chip companies," says Neil Wilson, a senior market analyst at ETX Capital. "There just aren't the foreign investors to buy so we are seeing more pronounced share price drops like those at BT, Dixons, Provident Financial, WPP and Centrica. Foreign investors maybe just don’t want the exposure to the UK market that in the past they would have. That's as much about domestic political risks as Brexit.”

Mrs May's progress also increases the risk of political brinkmanship as the new phase between the UK and the EU is thrashed out.

As the start of the talks was confirmed the UK’s main business groups, from the CBI which represents big companies to the Federation of Small Business, issued a joint statement calling for a transition period to be agreed as soon as possible. “Further delays to discussions on an EU-UK trade deal could have damaging consequences for business investment and trade, as firms in 2018 review their investment plans and strategies,” the business organisations say.

The scorecard for the economy at the end of 2017 is mixed. The UK is ending the year with strong growth in the manufacturing sector, near record levels of employment, record levels of foreign direct investment and a rallying oil price. GDP growth is likely to come in at 1.5 per cent, slightly down on 2016’s 1.8 per cent and considerably down on 2015 and 2014 figures of 2.1 per cent and 3.3 per cent, respectively.

Squeezed consumers are spending less, because real incomes have fallen, which is having an impact on the high street. Inflation is at a six-year high and growth forecasts have been cut for next year and the three years after that.

And 2017 will be remembered as the year when the Bank of England’s interest rate setters called time on the decade-long period of ultra low interest rates. In August Mark Carney, the bank’s governor, presided over an interest rate rise for the first time in 10 years.

In reality, the increase from 0.25 per cent to 0.5 per cent will barely have registered with either borrowers or savers, but the fact that interest rates are now expected to rise at least twice more over the next three years is significant. Optimists like to see it as a return to near-normal, after the long, lingering global financial crisis.

This year was also remarkable for the UK’s extraordinarily resilient labour market. However, between August and October, the number of people in work fell for the first time in a year, signalling the possible end of Britain’s five-year run of rapid employment growth.

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The oil price was also increasing steadily from mid-summer, much to the pleasure of the UK’s oil majors BP and Royal Dutch Shell. With Brent crude now around $64 a barrel, and many commentators suggesting it will break through $68, the industry seems to be finally shaking off the deep rut it tumbled into three years ago when global oversupply caused prices to plunge.

UK house prices, however, have not seen the precipitous rises of recent years, with central London valuees actually falling as overseas buyers put purchases on hold.

Across the UK corporate scene there have been few deals, although two huge ones were pulled off as Christmas approached. Hammerson and Intu announced that they would merge in a £7.3 billion (Dh35.71bn) deal that brings the UK’s biggest shopping centres under combined ownership.

The US$52bn agreed merger between Disney and 21st Century Fox, the media giant owned by Rupert Murdoch, appears to resolve the uncertain future for Sky, the European pay TV company popular in the UK that was 39 per cent owned by Mr Murdoch.

Other big business stories this year included the late-summer collapse of Monarch, a charter airline and one of the oldest brands in the UK travel sector. Its planes were grounded in October and the taxpayer-funded Civil Aviation Authority had to step in to bring all its customers home at a cost of more than £60 million. It was the third European airline (after Alitalia and Air Berlin) to go bust this year.

Another airline, Ireland's Ryanair, infuriated customers in the autumn by cancelling flights and services when it was unable to roster enough pilots to keep on flying. With more than 700,000 passengers left stranded, Ryanair’s reputation has been damaged although profits are apparently unaffected.

Uber was another company hitting the headlines for all the wrong reasons. In the US, a young female engineer called Susan Fowler exposed the culture of harassment rife at the ride-hailing company. Meanwhile, in London, the ride-sharing app was told that its operating licence was not being renewed because of its failure to keep its passengers safe. Uber is appealing the decision in a case that will be closely watched around the world.

Car sales have also slowed in the UK in the past year, not helped by government announcements on diesel cars and a long-term plan to ban sales of cars that are not at least partly electric by 2030, which has left drivers confused and cautious.

In all 2017 was not a year to toast for most business leaders. That the UK got to the end of it without a major calamity is probably something they will at least be feeling relieved about.