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2014 – Growth is Back!- Time to Act!

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I attended a talk at the Herts IOD on Nov 22. The talk was on the prospects for the UK economy given by Joe Nellis, Professor of International Management Economics & Director of Policy, Sustainability & Performance Community BSc (Econ) MA Ph.D. FHEA AcSS.

I felt pretty positive when I left. Below, I have tried to give some of the pointers, and my thoughts, from his very interesting talk. I was writing fast so any errors are all mine and not due to Professor Nellis. Please take a look at the site above if you want specifics as there are some interesting videos.

 “The Great Recession” is over.

Hallelujah, I say. Finally, we are on the road to recovery with 3 quarters of positive growth just behind us and a current annualized growth figure of around 1.7% predicted for the 2013 year-end.

Professor Nellis advised that UK PLC, excluding the banks, is sitting on the biggest mountain of retained profits ever. Over £750 billion has been retained by corporates and not spent during the recession due to their understandable level of caution. It was great to hear that 2014 looks much more optimistic and companies are likely to start reinvesting for long-term growth. The Bank of England is expecting around 2.5 – 2.8% growth in 2014. This is backed up by recent strong GDP growth that was better than expected. This was 0.7% and 0.8% in q2 and q3 is 2013. We await to see what the festive season holds but there are signs of optimism. Growth for this year is forecast to be 1.6%, up from 1.4% previously thought. Whilst our debt levels and business and consumer concern won’t be wiped out overnight, perhaps we can breathe out somewhat and enjoy the upcoming festive season a little more than the past 5 or so.

Sensible Approach to Investment

It’s a given that the UK economy needs a (sensible) investment led not debt-led growth. We don’t want to return to the mess in which we have found ourselves. However, business and consumer indexes are improving. There is a definite recovery in the housing market. This is a key driver in the economy. House prices are expected to grow by 10% in the next 12 months.

Professor Nellis advised that our Economy is better placed to withstand external shocks. He said that PWC advised that it would take a major crisis to halt this recovery e.g. Greece default. He suggested that this is unlikely though since the impact would be that French and German banks would collapse followed by our own. Hence, the Eurozone cannot afford for this to happen.

Confidence is on the Up

The more positive news comes from the CBI confidence index. This measures positive v negative sentiment and is currently sitting at a net positive of 24. This is the highest for around 3 years. This is supported by consumer confidence and a Yougov survey recently showed confidence rising sharply. I love their headline “BOOMING” CONSUMER CONFIDENCE SET TO SPUR GDP GROWTH”. Last month’s headline figure – based on YouGov’s Household Economic Activity Tracker (HEAT) data – shows the Consumer Confidence Index at 109.6 in October. This is almost 15-points up on January when the Index was at 94.9 and a near five-point increase since the start of Q3 in July when the score was 104.8.

A Change in Consumer Spending

It is true to say that the nature of consumer (and business) spending has changed since 2008. There are less discretionary spending, higher savings (where we can) and we are paying back debt. There will probably remain more caution and Professor Nellis postulated that perhaps we are seeing a new norm. That’s perhaps not least since, for so long, we have seen falling real wages, rising unemployment, government fiscal austerity, and a lot of gloom and doom. He, therefore, asked what might be the new normal. The question is to what extent people will go back to old behaviors and spending as we emerge into growth. The arrival and success of brands/retailers such as Aldi, Lidl, and Primark suggest that we are likely to have a long-term shift regarding our willingness to pay more for little perceived real benefit. Brands take note!

Professor Nellis also provided more positive news when he advised that there is a lot of investment money coming into London from China, Russia, and the Middle East. They are buying property including hotels.

Positive Indicators

As mentioned earlier, house prices are rising fast as both the economy and employment are rising and the cost of credit is at its cheapest for many years. Housing is assisted by the Government’s Help to Buy schemes. As a consequence, first-time buyers are back and the house building is strong. House prices fell by an average of 20% during the recession (maybe not enough or as much as expected) and the main worry is whether we are creating another bubble. Sadly, there may be no real option at this point.

It is likely that interest rates will go up sooner rather than later. He suggested that it possibly end in 2014 or when unemployment hits 7%. The Bank of England is playing this down.

Public finances are improving and by 2017/18 the national debt to GDP ratio will start to turn down. This means the debt as a percentage of our GDP will start to reduce. Note the debt is still growing but at a slower pace!

Forecast ahead

Most forecasters now predict the growth of around 2.5% through to 2017. At that rate of expansion, our economy doubles in size every 28 years

Other indicators looking ahead to 2014

      • Consumer spending around. 2 – 2.2%
      • Investment by companies – 6.5 – 7.1% which is strong
      • Budget deficit falling rapidly
      • Average earnings 2.6 – 4.1%. Normality is inflation plus 2.5%
      • Inflation 2.1 – 2.5%
      • Interest rates up to 2.7 by 2017

Risks and uncertainties

      • Continued fiscal austerity and the impact on growth
      • Euroland remains a worry. ECB figures are weak and we trade around 50% of our exports with Europe
      • Tapering of Quantitative Easing by the Fed in the USA
      • Interest rates must rise eventually

According to Professor Nellis, on balance, the degree of risk has diminished and we can look forward with confidence. For me, that’s good news in anyone’s book and confidence is a key driver of success. Finally, businesses and consumers will see the light at the end of a long tunnel and we can expect a greater willingness to spend and for all of us to finally look forward to a happy and prosperous 2014.

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