The EY ITEM Club called it first: the UK economy is improving
The EY ITEM Club spotted early signs of life in the housing market nearly 8 months ago. They were a lone voice amongst economic forecasters but the indications now are that they were pretty spot on.
The latest Summer forecast is the most positive for some time, forecasting GDP growth of 1.1% for 2013 and then rising to 2.2% in 2014 and then 2.5% or more in 2015 to 2017. While the upturn will be led by consumer spending and increased activity in the housing market initially, exports and business investment are expected to pick up significantly from 2014 creating the opportunity for a more broadly balanced recovery than some commentators expect.
Although most of the survey data in the last few weeks from the main economic survey organisations has been very strongly positive on both investment and exports , the UK is not out of the woods yet. The ONS published revised economic data last week, which showed that GDP had fallen more than we realised since 2008, but the major news was that investment had fallen 34% in the same period and corporate cash deposits were less than previously estimated. With evidence of profits under pressure, it is clear that businesses will need to ensure they are ready for growth if economic momentum builds as we expect it might.
Are you ready for growth?
The EY ITEM Club forecast has 4 key implications for business:
1. Is capital being used effectively? Could it be deployed rapidly?
- Capital Investment has slumped more than we thought and so there is a real risk that business does not have the capacity to grow rapidly. Have investment plans been developed and approved, so they are ready to go when the time comes?
- UK M&A is close to record low levels. In 1997 and 2002, when the UK saw similar slumps, transactions rebounded strongly and so we could see a fight for assets break out. It is vital that target lists are updated and options developed so that companies do not get left behind and see their competitors capture value through first mover advantage.
2. Are business models appropriate for a growing economy?
- Productivity has fallen as companies have substituted labour for capital, hoarded key staff and seen turnover fall. As future rates of growth are now becoming clearer, companies need to assess whether their business models appropriate, in particular, falling profits suggest another round of cost reduction may be required to free up the funding for increased investment.
- Pricesfor key resources are set to rise and wages overall will be rising at 3-4% from 2014. A battle for talent is a real risk; companies need to be prepared.
3. What is the best approach to Europe?
- The European economy continues to struggle but Europe is a huge market of relatively affluent consumers. International businesses must decide on the correct level of investment in the European market in their portfolios. This could involve managing for cash and limiting investment. But there are businesses continuing to prosper in Europe, especially when they invest in assets with exposure to higher growth markets that are starting to benefit from wage restructuring in Southern Europe.
4. Risk management
- The economic and political environment remains volatile and there are clearly risks out there. However, many of these are either manageable or are just normal risks that we have become blind to. High growth usually comes with higher risk – the challenge is to manage risk not avoid it.
We are not out of the woods yet but for the first time in a while there are positive signs. Business must continue to monitor developments and ensure it has the options available to respond as opportunities emerge.