UK economy faces year of challenges and opportunities in 2018

After all, there is plenty of evidence to support either view. Those who take the half empty view can draw justification from the uncertainty surrounding Brexit, sluggish GDP growth, and the squeeze on consumer incomes. For those who favour half full, there is the robust labour market, the rapid growth of new technology firms, and rising export demand for manufacturers, to provide evidence to support their view. 

So who will be proved right: the optimist or the pessimist? We believe that the uncertainty surrounding the economy makes a general rising tide for UK PLC unlikely. Our forecast for 2018 GDP growth is 1.5%, which is less than the 20 year annual average of 2.0%. However, we expect to see pockets of outperformance that property investors can target to achieve better returns. Here are the four sectors of the economy that may deliver strong growth in 2018.

1. Robotics and artificial intelligence (AI) 

This part of the digital revolution has been a rising tide for some time, but it is about to accelerate in the UK in particular as the result of the move towards Brexit. Firms will no longer be able to rely on labour from the EU, but the tap is being switched off at a time when unemployment is at its lowest level in 42 years. As a result firms will invest more in automation and AI to fill the gap, creating demand for office space from the technology firms. We see activity weighted towards cities with universities that have strong IT departments.

2. New wave finance 

In China, some cities are rapidly turning cashless, as more people pay for goods with their mobile phones. Even the buskers accept electronic payments now. A combination of ubiquitous smart phones, and pressure on regulators to open up the market, means banking in the UK is set for huge disruption. We believe the new wave of fin-tech firms, lacking the historic ties to London, will be more open-minded on where they locate. This could open up a new source of office demand for the regional cities.

3. Shrinking supply chains 

Even prior to the vote for Brexit, there had been a movement towards shorter supply chains, reflecting more customisation in manufacturing and a desire to speed goods to market. With the UK leaving the EU, more firms are looking to buy supplies locally, which could result in new manufacturing firms being established. These will need office space for their headquarters and product design functions. Also, we see the move towards customisation creating demand for city centre design offices, as manufacturing firms seek to employ more creative workers.

4. Green industries 

In 2017, the UK had its first ever day operating the electricity network without coal, drew 52% of its power from low carbon sources during the summer months, and broke records for wind power production, according to National Grid. A recent report from the International Renewable Energy Agency suggested green energy could cheaper than fossil fuels by 2020. We see green energy-related firms becoming more important in the economy and office market going forwards.

The Knight Frank Regional Cities Office Market Review analyses the performance of the ten major UK regional cities in 2018 and gives opinion into future trends.