The UK economy is set to grow at 2.9% in 2014 according to the EY ITEM Club Spring forecast: the strongest rate of growth since the financial crisis. The drivers of the recovery to date, consumer spending and the housing market, will increasingly be supported by an increase in business investment, forecast to grow at 8 to 9% a year over the next 4 years.
…and low inflation…
But this is not a typical UK recovery. With increased labour supply as a result of delayed retirement and welfare to work, lower import costs due to the strong pound and reduced commodity costs as a result of weaker global demand, the UK is set for a low inflation expansion, with CPI forecast to remain below the 2% Bank of England target until 2017. Growing investment will drive higher productivity and create further downward pressure on inflation.
…creating a positive environment for business.
The EY ITEM Club forecast cites a number of business surveys on expected profitability, investment intentions and recruitment, all of which support the view that the recovery is gathering momentum. The key elements of the forecast that businesses should focus on are:
- Strong and sustained growth;
- Increased investment;
- A recovering world market, including several UK target markets;
- Low inflation and interest rates; and
- A booming labour market.
Make sure your business model is aligned for growth…
The EY ITEM Club forecast predicts growing demand in the UK and internationally. This upturn will create opportunities but also raise challenges that businesses will need to respond to. An integrated strategy will be required to ensure the opportunity for profitable growth can be exploited successfully.
In recent years, companies have concentrated on doing what it takes to survive in a very difficult economy. With economic growth but subdued inflation, survival centric business models will need to change. In particular:
- A low inflationary environment is likely to make it difficult to raise end-user prices in a number of sectors, as an example, the February UK Retail Sales data revealed the pressure on retailers with clothing prices falling 11%;
- The labour market appears to be heating up and EY ITEM Club expect pay settlements to accelerate and for average earnings to run ahead of inflation; and
- A buoyant labour market may also mean there will be a war for talent and possible shortages across a range of skill sets.
Now is the time to undertake a review of the business model to ensure that the business is able to grow and generate returns in future. The 10th EY Capital Confidence Barometer released on April 7th shows how leading companies are reviewing their geographic portfolios and adjusting the balance of effort between cost reduction, organic growth and inorganic expansion.
…as there are opportunities…
The EY ITEM Club forecast identifies a number of opportunities for business:
- Exporters can expect continuing growth in China, a boost from the strong performance of the USA and even a return to positive GDP movements in the Eurozone;
- Business to business suppliers should ensure they are positioned to exploit the opportunities that the expected acceleration in business investment will create;
- Companies selling to consumers should benefit from rising disposable income and while consumer spending is not forecast to race away, steady growth of around 2% per year is too good to miss;
- Although Government spending will remain under pressure, the targets that have been set to increase employment and to continue to improve the quality and efficiency of the delivery of public services, mean that there will be opportunities for innovative businesses to benefit.
…that require attention now.
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 sustained and low inflationary, if unspectacular, growth. There remain risks and close monitoring is required especially of key indicators such as business investment, exports and house prices and mortgage to income ratios. However, this outlook is as good as it is likely to get and delaying too long may mean either that opportunities are lost to others or become more expensive to pursue in future.