Building what? Will the long-term economic plan deliver faster growth?

Builders everywhere… except in the GDP numbers.

After today’s Autumn Statement, no-one can be in any doubt about why the Chancellor of the Exchequer is so regularly seen in hard hat and overalls, as he told Parliament repeatedly today he is a builder. But by 2020, we will have had 10 years of building and it seems somewhat disappointing that UK GDP growth in that year will be around 2.3% according to the OBR, in line with our long-term trend rate of growth. Ten years of work and no change in our fundamental economic potential.

As the lack of acceleration in GDP suggests, the Autumn Statement offers the prospect of jam tomorrow but there is little sign of an immediate boost. In 2002, annual GDP growth is the lowest of the 5 year forecast period, business investment is expected to grow at 4.5%, below the average for investment in the economy as a whole, with Government investment at 9% driving the economy. The £1 Trillion of exports by 2002, seems completely unachievable with trade having negative growth of 0.1% in 2020, little different to the other 4 years in the forecast period.

Short-term pain…

The short-term outlook for business looks very challenging. The already announced National Living Wage will squeeze certain sectors of the economy such as Retail, Hospitality and Support Services hard. The new Apprenticeship Levy is likely to have an impact on total pay of  a similar amount but again disproportionately hitting relatively large employers. With no news on the proposed reform to Business Rates, and the new granting of power to elected mayors to raise rates to fund local infrastructure, there is the risk of  a real squeeze on corporates.

The Budget of the Department for Business, Innovation and Skills will be cut by 17%, which is less than some predictions, but this good news will be tempered by the conversion of certain grants and awards to loans. Funding of scientific research remains in place and there was additional support for manufacturing but on a small scale. Overall there was little to excite businesses in the short-term.

…for long-term gain?

The two main elements of the Chancellor’s longer-term strategy  that offer businesses the hope of longer-term growth are the proposed investment in infrastructure and the support for regional growth deals. Both do however appear to require a reasonably long time to have an impact.

We are planning to build and build…

There was over £100 Billion of Infrastructure spending announced with £50 Billion on Rail and £13 Billion on Roads the two key transport programmes. As EY research presented in our 2015 UK Attractiveness Report set out, road is the priority area for businesses and so these plans should be well received. Rail is a lower priority for business and so the largest element of the infrastructure programme may be less well-regarded.

If infrastructure is to boost the economy, the Government will have to show it can deliver. Performance in recent years has been weak in terms of delivery and well publicised shortages in construction workers may create further challenges, especially alongside the ambitious house building programme announced today. A 37% cut in the budget of the Department of Transport seems to be at odds with the need for resources to develop and co-ordinate a programme of this scale.

…and to rebalance the economy…

The Chancellor announced his “Devolution Revolution” which is made up of a range of policy initiatives. We have already highlighted the devolving of power over Business Rates, this is part of a wider reform of public finances that also includes the potential for local councils to keep the receipts of asset sales to use in driving more efficient operations locally. Further regional growth deals were approved and more are expected in an unprecedented attempt to rebalance the UK economy geographically.

The Chancellor made a great play in his speech of the fact that growth in parts of the North has been quicker than the South over the past few years. It will be interesting to see when EY launches its new UK Regions and Cities Forecast on December 9th if this trend is expected to continue. As the UK economy recovers it is possible that growth in London and the South eats may bounce back faster. Infrastructure investment and regional deals have some way to go before they drive economic output, after 2002 it would seem from the OBR’s forecast. Meanwhile, national policies on austerity and the still limited support for manufacturing will hamper the North relatively more.

…but it may take some time.

For businesses hoping for an economic growth boost to their business, today’s Autumn Statement will have been disappointing. The message is clear: in the short-term business will have to drive growth on its own with little extra boost from the public sector. There is a promise of longer-term benefit from infrastructure and devolution but this is dependent on the Government delivering. Up until 2002 the outlook is steady as she goes.


Is the Government spending enough? Can we really not cut our way back to a surplus or is it time to spend to grow?

Both the general public and business leaders appear to want less Government spending…

The May general election in the UK appeared to give a clear message on the public’s desire for less Government spending. As the chart below shows the support for higher taxes to fund higher spending was close to historic lows during the campaign.

Public Spending

Source: NatCen, April 2015

The attitude of business leaders was very similar. An analysis by Chris Giles of the Financial Times in November 2014 identified that 84% of business leaders surveyed wanted the welfare budget reduced faster than government plans and 71% and 54% supported the removal of the international aid and  NHS ring-fences respectively.

The Conservative Party set out its plans for spending reduction throughout the election campaign. The election result suggests that the public accepted the arguments presented. However, sentiment may be changing.

…except when it impacts them directly…

In recent weeks the implications of exactly what people voted for have started to become clearer. This has led to a breakdown of sorts in the apparent consensus in favour of financial tightening.

As the detail of the proposed cuts to tax credits emerged, public opinion was equally split between supporters and opponents of the policy according to YouGov. And this attitude also seemed to have spread to the Conservative Party itself. Most recently, a ComRes poll for ITV found 53% of people opposed to cutting tax credits.

Business leaders have also been making their feelings known on The Government’s  agenda. The National Living Wage, positioned by the Chancellor in the last Budget as designed to balance the impact of Tax Credit Reform, has been challenged as being too high for some business sectors, but without this the challenges to reform Tax Credits will be even stronger.  Business Rates continue to be a source of contention and concerns over reductions in research grants and support for scientific research have now surfaced as areas of disagreement and concern.

…and more disappointment is likely…

The reality is that the planned reductions in public expenditure sit uneasily alongside both increased demand for spending in many areas and commitments by the Government to improve provision in key areas. With an ageing population, a workforce, according to business leaders, in need of better education and training, concerns over inequality and increasing security concerns after the recent events in Paris, the public tax and spending plans set out in the July Budget will almost certainly disappoint significant numbers of people.

The list of demands for resources goes on. The Prime Minister promised an additional £8 billion of support for the NHS during the general election campaign but even this is being challenged as insufficient. Plans to rebalance the economy towards the regions have led to a number of deals being signed but the required funding is still to be agreed in many cases. Moreover ambitious infrastructure plans still have to be funded. The Government has made many promises to provide resources in valuable areas, but there may well be a mismatch to the proposed plans to limit expenditure.

…if the focus stays on costs…

The UK debate on public spending invariably starts with finance not strategy. We have heard various assertions around the UK not being able to afford more public spending with “the markets” often cited as the key reason. However, the UK can currently borrow from these markets at very low rates. On current plans, public spending as a share of GDP will fall to just over 36% by 2019, an extremely low ratio in UK economic history. This level of spending is a political not an economic target that seems out of step with the demand for services

…rather than opportunity cost.

There is an implicit, or sometimes explicit assumption, that if government reduces its activity, the private sector will do more to fill the gap. The current situation in respect of infrastructure, training and skills, investment in R&D and many others would suggest this is not the case. A more realistic model is one that accepts both that government spending is required to incentivise risk capital and that there are areas that only government can provide key elements of, such as funding for basic research.

Given the accepted need for improved and increased infrastructure, the need for more investment in health and social care, challenges in education and increased security concerns, all against a backdrop of the need to drive higher productivity, now would seem to be the time to go back to first principles and assess if increased spending could drive faster economic growth over time. With funding available at low rates, the potential return to society is very attractive and by cutting expenditure rather than investing, the UK is missing out by failing to recognise the opportunity being foregone.

Time for government to consider spending more to boost growth.

An approach of reducing spending to bring public finances back to balance and to reduce the overall level of debt extremely aggressively is very challenging. Just as corporate cost reduction has failed to boost UK productivity, so a failure by the public sector to invest will limit the UK’s rate of growth. A faster growing economy is one in which it will be much easier to improve public finances over the medium to longer-term. Current policy is only using a fraction of the tools available to reform the economy over time. The UK needs a strategy for public sector reform not an expenditure programme.


An Agenda for Trade Improvement

Common themes on required change but little sign of progress to date.

There have been a range of reviews of export performance in recent years by UKTI, the NAO, the political parties, the CBI and most recently the Cole Commission. While each study has a particular focus, there are a number of recurring common themes. In many cases these also reflect the content of the discussions EY and BCC have had with our contacts in the market.

In broad terms, the areas that businesses have identified as requiring action to remove barriers to increasing exports are:

  • Strong leadership and co-ordination by Government of all policy initiatives potentially impacting exports and a clear lead in improving access to fast growing emerging markets, in recent years this has centred on the BRICs, a focus that also requires review given the forecasts discussed in my previous blog;
  • Support from Government in providing information on market opportunities and market access with a strong view that this is especially important for SMEs;
  • Better export finance arrangements although the detail often requires clearer specification;
  • Improvements in education and training with languages and STEM skills being the highest priorities;
  • Investment in infrastructure, especially airport capacity and roads; and
  • Less regulation of export markets, though this seems to be more related to international market access than to the UK itself.

Supply chain issues are also raised on a regular basis although the solutions do vary between studies. The Cole Commission alluded to the need for ‘industrial policy’, and generally the request seems to be for Government to play a role in strengthening the domestic component of supply chains. There has been some activity on this front with the creation of ‘catalyst’ centres and the ‘reshoring’ initiative but EY’s research on Reshoring suggests there is significant potential to exploit a changing global landscape, but this will require more support and direction from Government to incentivise investment in both capital and labour. This would fit well with the devolution agenda, offering the scope to create clusters across the UK. As discussed above, a greater domestic share in value chains should also increase flexibility and control for businesses.

Looking at export performance, the studies and recommendations made to date, while well-intentioned, have had at best a very limited impact on export performance. Our analysis suggests that there may have been something of a fixation on the BRICs but there was limited attention given to articulating how the UK might succeed in these markets given the difference between the type of demand in these countries and the UK’s product portfolio. With a changing growth outlook, there is an opportunity to match the UK’s capabilities more closely to the expected opportunities.

EY’s suggested agenda for improving export performance

The clear message from the analysis summarised in this blog and the two preceding it, and set out in detail in the supporting report, is that being able to identify the most attractive markets and to move flexibly to exploit these opportunities are the key drivers of export success. An important part of building agility will be to continue to enhance the UK’s obvious strengths such as in services but also to build more domestic capability in selected opportunity areas with manufacturing being of sufficient potential scale to merit serious consideration.

If we accept this finding, then for proposals for change to have a chance of making an impact, they must be developed with this market focus in mind and be as specific as possible, with a clear articulation of how change will feed through into improved export performance.

On the basis of the preceding discussion, we have identified a number of priority areas for potential action to improve UK export performance. These are the areas we suggest we use as the basis for discussion.

Export success requires all the elements of trade to be aligned

The comparison of UK goods and services export performance confirms the importance of focus and control.

UK services exports have grown impressively in the last decade as the UK has been successful in selling to the world’s largest and fastest growing markets. This success does not appear to have been unduly hampered by regulatory burdens, infrastructure weaknesses or uncompetitive exchange rates. My previous blog highlighted the importance of market focus and agility as drivers of export success. It may well be that services are by their nature more agile and hence it is easier to change direction quickly in response to market changes than is the case with goods.

The UK has world leading capability in financial services and business services but is also able to generate a positive trade balance in a number of other service sectors. While it is likely that greater liberalisation of services’ markets in Europe would further boost UK exports, the sector has been able to thrive despite the restrictions that exporters currently face.

By contrast, although there are pockets of success, the UK has found it much harder to succeed as an exporter of goods. This to a large extent reflects the limited presence of the UK in certain fast growing markets and the mismatch of the UK’s goods portfolio to global demand. The decline in manufacturing over the last two decades appears to have limited the ability of the UK to move either quickly – the UK’s agility – or at scale, to meet the needs of the fast growing BRICs for industrial goods for example.

One stand out difference between services and goods is the stronger domestic position of UK based services companies. The UK has a thriving services sector and UK companies are strongly represented in the domestic market with a lower import share of final output than for goods. This provides companies with more direct control over their operations, pricing and supply chain and appear to lead to stronger market performance.

Offshoring may have delivered short-term benefits but created long-term challenges

EY research shows that the UK has offshored a greater share of its manufacturing capability than the USA, Germany and France since 1995 and there appears to be a correlation between the increased use of offshoring and the decline in the UK’s balance of trade in goods exports over the last two decades. UK manufacturers today import around 60% of the final value of their products compared to US manufacturers who import around half this proportion.

In a survey of UK manufacturers, we found that UK manufacturers have tended to contract out their manufacturing rather than either build or buy facilities in other countries. This appears different to the approach taken by Germany. Between 2010 and 2014 for example, German companies invested in 409 projects a year on average in Europe outside of Germany, compared to 256 projects from the UK.

Even more striking is the difference in project types. German companies undertook on average 165 manufacturing and 54 logistics projects a year compared to 29 and 10 respectively from the UK. German companies do appear to have taken a different approach to offshoring than their UK counterparts and this has allowed them to retain more control – greater agility – over their extended value chain.

Offshoring can offer immediate cost benefits and provides proximity to customers but as pursued by UK business to date, it might:

  • Reduce control over both quality and costs, we noted earlier that any benefits of competitive exchange rate movements are dampened by changes in import costs:
  • Potentially help support the establishment of foreign competitors that are able to gain scale and knowledge from contract manufacturing;
  • Limit the scope for process and product innovation by weakening collaboration opportunities across the value chain. Several US manufacturers have flagged this as a major issue to us.


The UK’s FDI performance is seen as a success story with the UK leading in Europe year on year for the number of projects attracted. However over half of the UK’s FDI projects are accounted for by sales and marketing establishments by international companies. It is true that this brings activity into the UK but it is also possible that these organisations will be seeking to substitute UK supply and could therefore weaken the UK’s domestic base. Germany has a similar profile of inbound FDI but as discussed above, appears to balance this more with more strategic Overseas Direct Investment (ODI).

While it seems right to celebrate the UK’s FDI success, such as attracting more manufacturing FDI projects than Germany in 2014, the overall impact is less clear. It would seem sensible to undertake a more thorough analysis of the costs and benefits of FDI. It is also worth be worth understanding if a different approach to ODI is one of the factors creating the apparent greater agility that German goods exporters appear to enjoy in terms of their ability to switch market focus.

Should the UK have an integrated trade target?

The relative performance of UK goods and services exports highlights the issue of the balance between domestic and external capability. Initiatives to improve UK performance generally focus on one aspect be it Exports, FDI or Reshoring. The potential benefit of a more integrated approach to the various elements of trade would appear to be a priority area for further discussion. It is possible for example that an export target may not be the most appropriate way to drive trade success and a broader target incorporating a aggregation of FDI, ODI and Exports is more useful.

The focus on the BRICs has hampered UK export performance. Now is the time to change course and play the ACE (America, China and Europe) and take another look at manufacturing.

UK exports are a consistent story of failed ambition and declining market share.

In 2012, in setting out his ambition to double UK exports to £1tn by 2020, the Chancellor of the Exchequer threw down a gauntlet to British exporters. At the current time there appears almost no chance of the UK achieving this target. UK export values have remained relatively flat over the last three years and the July 2015 OBR and EY ITEM Club forecasts suggest that £630 to £650bn is the realistic range for exports in 2020.

The failure to achieve this target should come as no surprise. The story of UK exports is one of a continuing long-term decline in world market share. The UK accounted for 10% of world exports in 1950 but this had fallen to 3% by 2009. Yes, other developed countries have lost market share too, but not at the rate that the UK has done so.

Having the correct market focus is the key determinant of national export performance.

Over the last 2 to 3 years, the EY ITEM Club has undertaken a series of analyses of the UK’s export performance for both goods and services over the last two decades. The key conclusion is strikingly clear: export growth is achieved by being successful in the fastest growing markets.

In this context, the most important attribute is agility – being able to identify and respond quickly to growth opportunities provides the key to export success, this requires a mix of coverage and capability. In recent years, especially compared to our peers in Europe, the UK failed to move either its market focus or its product portfolio quickly enough to exploit the opportunity created by the growth of the BRICs.

The focus on the BRICs has not been successful.

The numerous calls for greater focus on the BRICs have not boosted UK export performance. The EY ITEM Club research clearly shows that the UK has lagged our peers in penetrating these markets. This should come as no surprise. Yes, these are markets with long-term potential in terms of absolute size and increasing average wealth, but the goods and services demanded are not those in which the UK has a competitive position, the key import sectors have been manufactured goods, intermediate goods and commodities. It was unrealistic to expect that the UK was going to struggle to be able to grow quickly in these markets. The focus of UK export activity should be on those markets where growth is in areas that the UK has a competitive offer for the market.

Now is the time for UK business to move on and play the ACE.

The published forecasts of country and sector teams and our EY teams in the market all identify the USA, China and Western Europe as the three largest markets in money terms over the next 1 to 2 decades, with India emerging towards the end of this period as the next opportunity. Although insufficient to reduce China’s dominance of global growth, the slowing of growth in China together with the return to more normal monetary policy in the USA will squeeze demand and capital flows to emerging markets, with the result that the emerging countries will grow more slowly than we expected a decade ago. In similar vein, recent research by the Pew Centre indicates that the rise of the emerging market middle class is also happening at a slower rate than was previously forecast further reducing the attractiveness of emerging markets.

The BRICs were always going to be difficult markets for UK business, demanding a product set we were not particularly strong in. Of course, this may change in future but the UK needs a different approach to start to move the dial on export growth. In geographic terms, the acronym ACE better describes the opportunity for the UK: America and China offer the greatest absolute growth in markets and America and Western Europe offer the best levels of income per capita, important for the UK’s relatively high value goods and services.

 We will have to pick winners.

Sector wise, technology, life sciences and financial services are expected to grow at the fastest rate over the next two decades but industrial products and professional services will also grow at a healthy rate. In absolute terms, real estate, retail & wholesale and government will exhibit high levels of growth but may be difficult sectors to grow exports in as they tend to have high levels of domestic content and buyer power. Media and life sciences, two sectors prominent in much of the discussion on UK exports are relatively small in global terms, although both offer sizeable niche opportunities.

Industrial products leaps out of all our analysis as a very large growth area and one that is undergoing huge change as geographic rebalancing and technological innovation change the economics of the industry. The UK is dramatically under-represented in this sector as we have heard for years that we can’t compete in low labour cost sectors. However as technology changes the outlook there are clear opportunities of major scale for the UK to consider.

Now is the time to act.

The world economy is in the midst of a transformation. There is a clear rebalancing of corporate activity across geographies underway with risk weighted analyses now favouring more exposure to developed markets. This is impacting sector economics and creating opportunities for UK exporters.

The key to export success is being in the right markets in geographic and product terms, The UK needs to be clear on where its priorities lie and that these may be different in future to the emphasis we have seen in recent years, certainly the focus on the BRICs as a group should be reduced, while the way in which the UK approaches the technology and industrial products requires review. I will return to the way to go about this in future blogs.

Playing the ACE: UK executives are rebalancing their portfolios and turning to M&A in America, China and Europe to drive growth

Growth is back on the agenda for UK business…

UK executives are increasing their focus on growth, with 42% identifying it as a priority for the coming year compared to 33% of their global peers according to EY’s 13th Capital Confidence Barometer. For the first time in 18 months, growth has a higher priority than cost reduction.

…and M&A is core to achieving growth…

Economic confidence amongst UK executives is measured: 68% see the UK economy and 91% see the global economy as modestly improving, lower confidence levels than their global peers. With confidence in earnings, equity valuations and credit availability strong, M&A is seen as the route to accelerate performance.  More than half of UK companies intend to buy assets over the next 12 months.

CCB Chart 1

With UK deal value continuing to rise in 2015, M&A as a mechanism for growth looks firmly entrenched, with the market primed for further advances. Notably, all of our UK respondents expect their deal pipeline to stay the same or increase over the next 12 months, and, similarly, all expect the deal market to stay at current levels or improve.

…with the developed markets the priority…

Our Barometer shows 82% of UK executives targeting investment opportunities outside their immediate region, with the US, the Eurozone and China, the top destinations. An improvement in economic and financial conditions in both the USA and Eurozone has increased the appeal of assets exposed to these economies. The relative fall of the Euro, is also encouraging UK companies to reconsider the Eurozone, with 41% reporting their appetite for acquisitions in the region has improved. 

…as interest in the emerging markets falls…

Interest in emerging markets is subdued, with 78% of all UK respondents planning to allocate 25% or less of their acquisition capital to developing regions. (If investment was proportional to GDP growth we might expect 40 to 50% of acquisition capital to go to these markets). This reduced ambition reflects declining growth outlooks and an increased awareness of risk: 28% of UK companies identified slowing growth in emerging markets as the key risk facing their business over the next 6 to 12 months, and 22% selected increased global and political instability when asked the same question. Without doubt, UK corporates are rebalancing their geographic ambitions with a relatively higher allocation of capital to developed markets.

CCB Chart 2

…and domestic activity is likely to slow.

Despite the UK leading among developed countries in economic performance and UK executive confidence in the local economy and corporate earnings remaining upbeat and improving – 93% of UK executives  expressed overwhelming optimism in corporate earnings up from 62% in April – domestic deal-making is only expected to account for 20% of UK led M&A activity.

There are risks in the economy but the main driver of reduced UK deal expectations appears to be concerns that valuations in the UK are set to rise, 43% of executives expect this over the next 12 months with 34% seeing this lead to a widening of the gap between buyer and seller expectations.

CCB Chart 3

The focus will be on quality not quantity.

This is not growth at any cost. The proposed strategies are realistic and balanced combining organic and inorganic growth as appropriate and very mindful of risk. 83% of UK deals are expected to be bolt-ons to the existing business and only 2% will be transformative, ie dramatically shifting the focus of the business. UK executives are also much less likely to do out of sector deals, 14% compared to 48% of global respondents. All of the expected deals are expected to be below the $1 Billion mark. UK companies are planning to expand internationally but in a controlled way, looking for a small number of high quality, manageable deals rather than a scattergun approach.

Rebalancing the portfolio and playing the ACE.

Increasing corporate confidence and low but stable economic growth are leading UK companies to search for growth across all of the opportunities available to them. The world economy has rebalanced, with the range of relative growth rates between developed and emerging markets narrowing at the same time as relative risk has widened. As a result UK businesses are rebalancing their portfolios. Growth adjusted risk measures now favour the USA and Europe and China’s sheer scale means it will continue to be an important region. It seems as though the BRICs story is over for now as UK businesses play their ACE.

The UK economy : steady if unspectacular growth

A domestic growth story…

It is encouraging that the EY ITEM Club UK Autumn forecast projects GDP growth of 2.5% for the UK for 2015 – a figure only slightly changed from the Summer forecast, despite the recent turmoil in the global economy. EY ITEM Club also expects steady – albeit slightly slowing – economic growth for the UK over the next few years, based primarily on rising domestic demand.

This largely domestic growth story reflects the continuing challenges in the global economy. China is at the epicentre of the problems, as the authorities there try to rebalance the economy from an investment and export-led model to a consumption-driven one. Although this plan and the related slowdown in headline GDP growth have been known for some time, it seems that developments over the summer caught the markets off guard. The combination of devaluation in the renminbi, sharp falls in the Chinese stock market and disappointing growth data has undermined the previous benign narrative for China’s economy.

The slowdown in China will have consequences for both commodity producers and goods exporters, with the greatest impacts falling on emerging markets. The pressure on these countries will be further intensified by the expected rise in interest rates in the US – a move that is likely to reduce capital flows to emerging markets.

…led by the consumer

With the Government reining in spending to reduce the deficit, it will be the consumer driving UK economic growth this year. The labour market remains strong and wage growth is increasing. With low inflation and no rise in interest rates as yet, consumer spending is continuing to rise. However, the UK consumer still faces headwinds: inflation will tick up as the oil price decline from about a year ago drops out of the calculation of the annual rate; and fiscal policy – notably the tax rises and welfare cuts announced in the Summer Budget – will start to affect incomes from next spring. The impact from these factors projected by EY ITEM Club is gradual but significant, with consumer spending growth decelerating from 3% a year currently to just under 2% over the next three years.

Time for UK businesses to step up…

While the consumer has led the UK recovery to date, recovering domestic demand has recently seen businesses start to increase capital investment. EY ITEM Club expects this trend to continue as the main conditions for investment – profitability, availability of funding and the cost of capital – all remain attractive. The introduction of the National Living Wage and accelerating wage growth in several sectors will further boost the relative attractiveness of capital investment compared to employing people. Already, the combination of increased business investment and higher real wages appears to be stimulating improvements in productivity. Maintaining this improvement will be key to the UK continuing to grow in line with the EY ITEM Club’s forecast.

…and take steps to adjust for the changing economy…

The UK economy is rebalancing as the EY ITEM Club expects rising business investment to continue to drive growth over the next few years. It’s not just capital investment that is on the rise. M&A values are increasing in the UK, and were up by 44% year-on-year at the end of the third quarter. And let’s not forget that 2014 was a record year for Foreign Direct Investment into the UK. All these developments underline that the global and UK economies are changing. It is clear that some businesses have started to adjust their plans for this new environment. But, going forward, all UK businesses must take steps to benefit from the changing economy.

…by reviewing their geographic focus…

First, for businesses operating internationally, now is the time to review their geographic focus. While recent events in China have surprised the financial markets, corporates appear to have been more aware of the risks. In the year to September 2015, research by EY and Dealogic suggests that M&A volumes in North America and Western Europe are up over 30% – compared to about half this rate in China, and flat in the rest of the world. This is consistent with the findings from other EY research: both our European Attractiveness Report 2015 and our Global Capital Confidence Barometer have found that corporates are investing, but with a strong focus on rebalancing their portfolios back towards developed markets.

…and revisiting their investment plans

The second area to focus is investment plans. The UK has launched an effort to rebalance its domestic economy by devolving more economic decision-making to local bodies. The Northern Powerhouse is the flagship for this drive – but the nationwide momentum was underlined when the recent round of Growth funding attracted over 30 bids from regions across the UK. This advancing regionalisation represents a potentially dramatic change to the UK economy, and businesses should take full advantage of the opportunities it creates. Against this background, and with labour likely to become more expensive relative to capital going forward, businesses need to look again at their capital expenditure plans – and ensure they are optimising their mix of resources in the light of the changing economy.