A week on the train…
I have spent the last week or so travelling up and down the UK meeting with over 200 EY clients at breakfast, lunch and dinner events from Glasgow to Leeds to Birmingham and swapping views on the UK economy. It has been a fascinating experience allowing me to pick up on the nuances that get lost in the macro-economic perspective and to collect view that are not shaped by the very unique nature of the London economy.
…has lifted my spirits…
There is no doubt in my mind that the business community I have been meeting with is more optimistic than at any time in the last two years. My perspectives on rising consumer confidence and increasingly positive business survey data consistently drew nods of agreement. There is a sense that the worst is over and the focus is shifting from preservation to expansion.
…but there is a long way to go…
However, it was also true that the scale of optimism was significantly lower than the record levels of increase in business confidence that some of the recent PMI surveys have identified. The mood is one of optimism, but very much cautious optimism.
The consistent sentiment coming through is very consistent with the results from our recent Capital Confidence Barometer survey. Thoughts are turning to growth but the actual implementation of growth plans will be relatively conservative: organic rather than inorganic moves will dominate; the focus will be on extending the core as opposed to major transformational moves.
My discussions over the last week or so have confirmed my view that the financial crisis has been so long and severe that the relationship between confidence and action has changed: businesses today need to have a greater level of confidence to encourage them to invest than was the case prior to the crisis. We are in a new paradigm and this may well limit the speed of the upturn, it will certainly mean that any future shocks could create a very volatile reaction.
…and the risks are well-known…
The UK is in familiar territory, a consumer and housing led recovery. We have been here before and it is fair to say there is some scepticism as to the sustainability of the recovery. I was regularly quizzed on forward guidance, the risk of a housing boom, increasing consumer debt and the situation in the Eurozone.
The questions I received and discussions I had both suggest that the low interest rate policy being pursued by the Bank of England will only have a limited impact on business investment decisions. The two factors that consistently came up when I asked what needs to change for investment to grow are:
- More confidence about the sustainability of demand; and
- A clear and potentially lasting reduction in the risks that have dominated economic activity in recent times.
But things may be better than we realise
All of the macroeconomic data suggests investment is struggling to recover and growth is not as strong, especially exports, as the survey data would imply. My sense is that there is more activity that may not yet be being reflected in the official data
However, care is needed not to strangle the upturn
The CCB identified an increased concern amongst UK corporates on corporate governance, risk and regulation: this is an accurate representation of current sentiment. Business perceives that the mood has shifted since the financial crisis and that there is both more pressure to regulate and shape behaviour from policy makers and increased interest from customers and the public on the appropriateness of corporate behaviour.
In this new environment, policy makers have to be sure to balance the benefits of intervention against the cost. The current debates on taxation and energy policy were regularly cited by business leaders as areas of concern potentially inhibiting action.
The outlook for 2014 is positive
Overall, the discussions I have had have confirmed the message from the economic data: the UK economy is moving forward and gathering momentum. However, business has yet to commit and the first half of 2014 will be critical in determining if the recovery has the legs to sustain it. Plans are definitely in place but these now need to be implemented.
The current forecasts of GDP growth of around 2.5%, significantly up on 2013 but not racing away, seem to fit the mood well. However, if the first half of 2014 goes well, and there are no new shocks from tapering, inflation, the Eurozone or other political unrest, then the second half of the year could see a significant acceleration.