WEEKLY COMMENT 10-10-2013

WEEKLY COMMENT 10-10-2013

By Barry Edwards

A Personal View of the UK Economy

 

Over the last six months the growth in the UK economy has surprised most people since there was no obvious sign that business activity had improved substantially. The IMF, the OECD and the Bank of England have doubled their forecasts for growth in the UK economy for 2014. The government has given itself a pat on the back for being so skilled at managing the economy while the opposition have had no choice but to fall into line with the forecasts; they have changed tack and emphasise the lack of improvement in wages when household costs are continuing to rise.

There is definitely an air of confidence penetrating the business world encouraging chief executives to consider new capital expenditure investment to grow their companies. There are still areas of uncertainty to this re-emergence of growth which is evident in most of the countries that have been through severe financial problems. Some of these uncertainties are self-imposed, such as poor management of national economies and the USA government shutdown although there is talk of a compromise evolving.

However, overall everyone is confident that growth is here to stay; it is simply a matter of whether it is going to remain at a slow pace or react as it has done in the past and quickly return to previous levels around 3-4%. Most economists and financial commentators believe growth cannot reach the higher levels until the banks are properly recapitalised in Europe since it is has an enormous influence on the world economy.

Returning to the UK economy, it is important to state that it is dependent on how the world economy is growing since it is one of the most open economies. The larger companies are very reliant on international trade and have the majority of their business activity abroad. Consequently, the UK will only grow if the small and medium sized enterprises (SME’s) can expand and invest. Therefore concentrating resources into this sector is vital if the higher levels of growth are to be achieved.

The UK banks are raising the extra capital they will need to provide the funding for this business expansion and are gradually responding to the demand for working capital from the SME sector. The change over the last six months has been noticeable when companies approach the banks for this expansion finance. They are definitely concentrating on those businesses that have the potential to grow and employ more people, especially the government controlled banks.

The government is having some impact on the funding of the SME sector but so far it is very limited mainly because the resources are not available and they do not have the mechanism to really make a difference. The Bank of England is providing access to low interest rate funds to the banks through its ‘Funding for Lending’ scheme and trying to influence confidence by committing to keep interest rates low until 2016 providing nothing unexpected occurs.

The ‘Help to Buy’ scheme is definitely improving the potential of the building industry which will have a big impact on employment in that important sector. The improved tax incentives for the ’Enterprise Investment Schemes’ (EIS) are increasing the amount of equity capital available especially via the rapidly expanding Internet based ‘Crowd Funding’ method and ‘Business Angel’ groups.

Alternative sources of finance from the Internet based ‘Peer to Peer’ lenders compete directly with banks for the SME market which is doubling in size every year and currently provides £600 million in loans to companies. New banks have been created during the great recession to provide a much more user friendly service to customers and SME’s which are also growing rapidly but proportionately are still very small compared to the main banks.

Access to finance is improving for SME’s and the opportunities and sources are now more varied than prior to the financial crisis. Unfamiliarity with these new sources is one of the reasons they are not growing even more quickly than they could and it is only a matter of time before they become truly recognised as alternative providers of finance to the banks.

A big change has taken place over the last five years in the lending and equity investment market which has not really been well publicised. It is this change and evolution in the financial services sector that will help to transform the approach to supporting the SME and corporate funding market. Much more attention is being paid to the utilisation of the funds provided which will reduce the failure rate of smaller businesses. Funding providers are beginning to link more active involvement with their customers to reduce the risk of lending and are much more willing to be proactive in solving problems when they occur.

In my view, this new atmosphere to lending and investing in SME’s will make a big difference to the growth of the UK economy and start to impact on the unemployment figures over the next year.  The dependence on the financial sector to generate the tax revenue for government to balance the books will not be so prominent in future and a more diverse economy will evolve.

When this does show through, the creative flair and latent talent in the British nation will be allowed to flourish properly supported by investment and working capital resources to grow companies that have something unique to offer. It is my opinion that the next five years in the UK will be an exciting period of growth that will be the envy of Europe and compete with best businesses worldwide.

I look forward to being part of this transformation and encourage all executives in the SME sector to take advantage of the potential. Recently I have spoken to business owners who are making plans to grow their companies as they see the demand for their products and services increase. There is definitely opportunity out there for those businesses willing to take advantage of the return to growth and I wish them all success in the future.

That’s all for this week, more observations next week.