business focus 15


UK economy will continue to stutter until UK plc fuels future growth


The economy will stall for the rest of the year, until a more sustainable recovery takes hold in 2013, according to a report by the Ernst & Young ITEM Club


Emergency measures from the Bank of England, ECB and US Federal Reserve have boosted confidence and stabilised financial markets. But ITEM Club’s spring forecast says it is now up to UK plc to drive the recovery forwards and prevent any relapses.


ITEM Club forecasts that UK GDP growth will be a dismal 0.4% this year, before rising to 1.5% in 2013 and 2.6% in 2014.


Corporate cash piles are sapping strength from UK economy


While the wider economy is bumping along, UK corporates remain in good shape and have continued to stockpile cash on their balance sheets at an accelerating pace. The cash balances of private non-financial companies are worth over £754 billion, a staggering 50% of GDP, but business investment last year only increased by 1.2%.


Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club, said that the UK won’t begin to prosper until these funds are put back into the economy. “Business investment has picked up nicely in the US but UK companies remain extremely risk averse, which is sapping strength from the economy.


“Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list.”


The ITEM forecast shows that even if businesses grow investment by 6% next year and 10% in 2014, that won’t go far enough – the company sector financial surplus is still expected to increase from 5.2% of GDP in 2011 to 5.6% in 2014.


Households remain under the cosh


In contrast to big business, households remain under intense pressure. ITEM says that it will become increasingly difficult for private sector companies to create the jobs to offset losses in the public sector, as the austerity programme takes hold in earnest.


THE BUSINESS MAGAZINE – THAMES VALLEY – MAY 2012


Julian Gray, Ernst & Young’s senior partner in Southampton, said: "During last month’s Budget announcement the chancellor challenged UK businesses to double exports in the next decade and increase the level of business with the BRIC economies. While growth is forecast to remain slow in the UK, businesses across the south must accept the chancellor’s challenge and look to expand into international fast-growth markets to avoid being left behind by their competitors.


"Our Growing Beyond campaign is focused on advising businesses on the best ways to make an impact into foreign markets and help companies grow cross border. In the light of sluggish performance in developed markets, many companies are increasingly looking to rapid growth markets to sustain growth. In a survey by Ernst & Young, 87% of CFOs agreed that it is difficult to justify increasing resource allocation to developed markets when other parts of the world are growing more quickly.


Julian Gray


Unemployment is expected to approach 9.3% of the UK’s total workforce by the middle of next year, with just short of three million people out of work, before beginning to fall back.


But exports are making an important contribution


However one bit of good news in the ITEM Club’s forecast is the UK’s export performance. Although shipments to the Eurozone have been restrained, exports outside of the EU to countries such as the US and China are growing strongly.


Exports of goods increased by 5.1% in volume terms in 2011, while services were up by 3.9%. The UK is expected to put in a similar performance this year, with exports growing by 4.5% and net exports adding 0.3% to GDP.


Concluding, Spencer said: “A lot still hangs in the balance. After three business-friendly Budgets and more tax cuts in the pipeline, it’s now up to corporates to play their part in the UK’s recovery. The business community needs to grasp this opportunity quickly or face the consequences after the next general election.”


"Businesses across the region must be building strategies to enter new markets. Currently only 4% of the UK’s exports go to the BRIC economies so it is critical that businesses explore these economies now in order to find growth while economic conditions at home remain fragile.


"There is a danger that the UK is being left behind by Germany when it comes to exporting abroad and we must establish stronger global networks to catch up.


While the chancellor challenged businesses to increase the level of business with BRIC economies we would also advise local firms to look to other fast growth markets such as Turkey, Indonesia and Malaysia where opportunities for growth are increasingly strong."


Details:


Julian Gray Senior partner for Southampton 023-8038-2100


Neil Hutt Senior partner for Reading 0118-9281599


www.ey.com/uk


www.businessmag.co.uk


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