A “lop sided recovery” – is business ready to commit?

The EYITEM Club is predicting strong growth in 2014 and beyond…

The UK economy is set to grow at 2.7% in 2014 according to the EYITEM Club Winter forecast: the strongest rate of growth since the financial crisis. The main drivers of growth will be consumer spending and the housing market. Consumers are taking the risk that real incomes will start to grow more rapidly as the recovery becomes entrenched.

…but businesses have yet to commit to investment…

Business confidence about the economy and future profitability has risen significantly leading to a rapid increase in investment intentions. However, intent has yet to translate into action: businesses are proving more reluctant than consumers to spend money.

…although hiring has increased.

In stark contrast to the record low level of business investment, is the record high level of employment in the UK. Over 30 million people are now in work and unemployment continues to fall despite an increase in the workforce of over 1 million people over the last two years. This growth in employment has been accompanied by a fall in real wages but, given the lacklustre performance of GDP in this period, the net result is that UK productivity has fallen. The fall in productivity most likely reflects a number of factors, but it does appear that to an extent, business has used the growth in the labour pool to its advantage, to substitute labour for capital and to do so at competitive labour rates.

Now is the time to look forward at growth opportunities…

EYITEM are in no doubt that for the recovery to be sustained businesses must now start to invest for the longer term to position themselves to benefit from growing demand in both the UK and internationally. The keys to success are effective targeting and timing of investment.

  • Demand in the UK is growing but this is not uniform. EYITEM highlights the above average growth in the numbers employed in certain sectors: UK Professional & Scientific Services has grown by 136,000 jobs in the last 2 years; Administrative & Support Services have grown by 104,000 jobs; and Health by 100,000.
  • The global economy is also recovering but again not at a uniform rate. The USA is on course for strong growth in 2014 and beyond and China appears to have stabilised its GDP growth rate at just over 7% per annum. However, while conditions in the Eurozone are improving, growth will be subdued.  Even so there will be opportunities: Spain, for example, is experiencing an export led recovery as falling real wage costs support improved competitiveness and there is increased business interest in investing in production capacity in Spain.

…and business models…

In recent years, companies have clearly done what it takes to survive in a very difficult economy. At a macro level, the fall in productivity, increase in cash holdings, reduced investment and increased hiring of lower cost labour all illustrate this trend. However, it is unlikely that the business models which have emerged are the ones most appropriate for a faster growing economy with lower inflation than we have become accustomed to. Now is the time to work through the options for addressing the increased demand and to understand the economics of alternative strategies and investment plans.

…paying special attention to labour…

Without doubt, the last few years have seen a major change in the UK labour market, with a significant increase in the labour supply being absorbed without upward pressure on real wages. Companies must now work through their future strategy for human resources:

  • While EYITEM expect labour supply to continue to increase it will be at a slower pace and there is likely to be more pressure on real wages, especially in some of the high growth sectors identified above: the challenge is to balance retention with efficiency.
  • The EYITEM report also highlights several structural shifts in the labour market, most notable of which is the increase of over half  a million people due to older workers delaying retirement. This could become a major issue affecting talent development. An older workforce risks slowing the progression of junior staff and blocking promotion and hence the chance to take on more responsibility. This may mean more talented junior staff will be at risk but also that at some point in the future there will be a talent gap when older workers do retire and junior staff will not have acquired the experience to replace them. Benign labour market conditions today should not blind companies to the risk of future problems.

…or face the consequences

Companies have generally focused on survival and good housekeeping in recent years and have been rewarded for this. With confidence rising, growth prospects more positive, cash on the balance sheet and increased availability of finance, all the conditions are in place for a rise in M&A activity. Companies that do not deploy their resources effectively to balance risk and reward may find their control of their own destiny eroding. The first full week in January saw over US$ 100 Billion of deals announced and we can expect more to come.

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