12 business focus
UK recovery has got legs, says EY ITEM Club forecast
EY ITEM Club’s Summer Forecast says UK recovery has finally got legs, with consumer spending and the housing market propping up GDP this year until the long-awaited revival in exports and business investment kicks in next year
Mark Gregory, EY’s chief economist, commented: “It’s looking much more positive and we’re unlikely to see a repeat of 2011 when a recovery in confidence was crushed by the euro crisis.
“Spending on the high street is holding up nicely, housing market transactions are beginning to gather pace and, perhaps most significantly, the global economy also appears to be on the mend.“
UK GDP will reach 1.1% this year, before accelerating to 2.2% in 2014 and 2.6% in 2015, according to the latest economic forecast from EY ITEM Club.
Consumer revival well under way
Despite only modest increases in real incomes, consumer spending will continue to improve this year. The EY ITEM Club says spending is likely to grow by 1.6% this year, rising to 1.9% in 2014. Although, the report warns that consumers will dip into their savings to fund the spending splurge – with savings ratios dropping back to 5.6% compared to 6.3% last year.
’Greater economic stability and an improvement in investor confidence should encourage firms to stop hoarding and start releasing their cash surpluses for investment projects and recruitment’
There is also good news for the UK’s housing market. Mortgage approvals are already running at their highest level for over three and a half years, boosted by the Government’s Funding for Lending scheme (FLS), and will receive further support next year from the second leg of Help to Buy, which will release pent up demand on the lower rungs of the property ladder.
According to the report, over one million people will be moving home this year. House prices are expected to follow, increasing by 2.3% in 2013, 5.5% in 2014 and 6.3% in 2015.
The long wait is over – exports boom expected next year
According to the report, the most significant boost to the UK’s economic growth prospects
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Business investment is expected to increase by 8.1% next year, 9.4% in 2015 and 7.5% in 2016, providing the UK with balanced, sustainable growth over the medium term.
Be prepared or miss out, warns EY
Gregory said that companies will need to start preparing for the upturn or risk losing market share to their competitors. “Businesses have been in survival mode and have been focused on battening down the hatches rather than investing for the future.
’... we should feel confident that things are looking up’
“But with an improving economy we could be at a tipping point when activity might increase rapidly and without warning. The challenge for corporates will be to ensure that their business models are fit for purpose and that they have investment and M&A options in the right sectors and markets, to ensure they are ready to make strategic moves ahead of the competition.“
Mark Gregory
will come from the long-awaited revival in exports and business investment next year. Net trade was a substantial drag on GDP in 2012 but, with an improving outlook in key markets such as the US and China, the EY ITEM Club expects UK exports to increase by 1.2% this year and 4.6% in 2014.
Peter Spencer, chief economic adviser to the EY ITEM Club, explained: “There are hopeful signs for the world economy, which will lead to a pick-up in demand from the UK’s key export markets. The US has successfully negotiated the fiscal cliff, the Chinese economy is beginning to rebalance away from investment to consumption, and there is also a move towards pro-growth policies in the eurozone. If managed successfully these factors could be a real boom for UK exporters.“
Business investment set to accelerate
It’s a similar picture for UK business investment. Despite strong corporate balance sheets, investment has fallen by a massive 34% since 2008.
“But this should all start to change from next year,“ said Spencer. “Greater economic stability and an improvement in investor confidence should encourage firms to stop hoarding and start releasing their cash surpluses for investment projects and recruitment.“
THE BUSINESS MAGAZINE – SOLENT & SOUTH CENTRAL – SEPTEMBER 2013 Risks to the forecast
Concluding, Spencer added: “The UK recovery is becoming firmly entrenched but there are nevertheless a few big ’ifs’ which, if they are realised, could slow down the pace of growth. The eurozone and the emerging markets will remain on the worry list for some time yet, while the US successfully managing their QExit is no foregone conclusion. But we should feel confident that things are looking up.“
Details:
Julian Gray Senior partner for Southampton 023-8038-2000
Neil Hutt Senior partner for Reading 0118-928-1100
www.ey.com
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