Could the “New Normal” become the “NICE Normal”? Time for an in-depth assessment of the opportunities in the UK economy.

This time it’s different…
When Professor Peter Spencer, Senior Economic Advisor to the EY ITEM Club, says that the UK labour market is behaving unlike any other labour market he has ever seen , it is clearly time to dive in and assess what is happening in the UK economy. Are we really be on the verge of a new economic paradigm? And what might this mean for business?
…and it could be very NICE…
In the period leading up to the financial crisis when the world economy seemed to be on an ever upward trajectory, the UK was described as experiencing a NICE (Non- Inflationary, Continuous Expansion) decade. This, as we now know, came to an end with a resounding thud. But there are now signs that a more lasting NICE period may be on the cards. The key messages from the EY ITEM Club UK Summer forecast are:
– the UK economy has moved from recovery to expansion mode, with growth of over 3% in 2014 and 2.5% on average thereafter;
– a more balanced UK economy with investment contributing a similar amount to growth as consumer spending;
– inflation below the 2%  Bank of England target and low inflationary expectations;
– no pressure for interest rate rises and little expectation of rates moving anywhere near to historic level when increases finally begin;
– businesses are currently able to cope with a strengthening sterling exchange rate, up over 12% year to date.
…as the economy has changed…
This is a different type of UK recovery. It began with growth in consumption driven by increasing numbers of people in employment rather than by  real wage rises. The UK labour supply has increased significantly in recent years as a result of people delaying retirement and working longer, success in reducing welfare claimants in certain parts of the market and immigration. Allied to reforms in labour market legislation over the last two decades, the UK now has a relatively flexible labour market in which people appear willing to remain in work rather than push for real wage increases. As the recovery has gathered speed so businesses have become more confident about the level of future demand and we have seen business investment pick up significantly in the last two quarters. This we are witnessing a more balanced domestic recovery with trade still lagging.
As a result the UK has now been able to return to close to the pre-crisis level of GDP despite a fall in overall productivity. GDP per Head and output per ahead are lower than in 2008 but more people in work means that total GDP has recovered. This has been achieved despite a significant fall in capital investment in the period since the financial crisis: the EY ITEM Club forecast suggests that investment is still 12.5% below peak levels.
Productivity and the labour market are only 2 aspects of a UK economy in transformation:
EY’s UK Attractiveness Survey recently highlighted  the UK’s success in attracting Foreign Direct Investment: software investment was up 55% in 2013 and the UK led Europe in R&D investment;
– as the EYITEM Special Report on Services Exports demonstrates, the UK is a leader in services exports and this sector is poised for significant growth as the world economy recovers, UK services exports are much less dependent on Europe than our goods exports;
– the sectoral mix of the economy is shifting with professional and IT services growing very fast and the health, education and media sectors becoming more important relative to financial services and oil and gas;
– even some of the more worrying aspects of the recovery, such as the impact of low wage growth on the lower paid members of society, are creating opportunities as shown by the growth in discount retailers for example.
…creating opportunities in many areas…
There remains much more to do to secure the UK’s recovery and we should not be complacent, but relative to many of our competitors, the UK economy is in strong place. Business confidence in the strength of demand and general consumer confidence are back to pre-crisis levels and the UK is now a growing economy with competitive tax and labour market regimes. Foreign investors have shown their willingness to invest to support the transformation of the UK economy. This is a recovery build on strengthening domestic demand and while trade growth has so far disappointed, there is potential for trade to provide a future upside to domestic led growth.
…meaning businesses need to begin to take the recovery seriously…
After the severe economic shock which the UK experienced, it is unsurprising that businesses were reluctant to commit to future investment without being certain that the recovery had legs. This is now changing with a 10% year on year increase in business investment in the first quarter as more executives start to recognise the potential and relative attractiveness of the UK economy.
The key actions for businesses as they look to exploit the growing UK economy are:
– Evaluate the sectors, segments and geographies they operate in. Individual parts of the economy will develop in different ways so it is vital to understand the situation in each area of focus.
– Spend time working through what an increase in business investment will mean. Do you need to respond to match your competitors or does it mean your customers or suppliers will be investing?  For example, it is likely that there will be significant growth in IT investment as the economy transforms and grows but this may be in different ways to the past with mobile and cloud solutions to the fore, businesses must assess their readiness for technological change.
– Consider the scope to expand across the value chain, possibly substituting imports currently flowing into the UK in areas in which  domestic production capacity has declined.
– Revisit M&A. The value of M&A are now reaching pre-crisis levels, volumes are lower but corporates are increasingly willing to consider strategically important deals that offer synergies and consolidate competitors.;
– Don’t neglect Government. Public finances are still very challenged and the UK austerity drive continues. Ideas to transform the efficiency of Government delivery will continue to be important potential sources of future opportunity.
…to avoid missing out.
After many false dawns, scepticism is a natural response to claims that the economy is moving forward. However, the signs are promising and it does appear that the is change afoot beneath the headlines. Much needs to be done to ensure these improvements can be sustained and there remain challenges with youth unemployment, lack of wage growth and imbalances between the UK regions. But there is clearly opportunity in the recovery and businesses do need to assess their plans to ensure they are not missing out.

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