While growth is expected to return, it will be a long road to recovery.
The downturn may be close to its conclusion but dark clouds loom on the horizon for the year ahead. The level of public borrowing, combined with increasing unemployment and a downturn in orders, has pushed corporate UK right up against the wall in one of the toughest and most brutal recessions witnessed in recent times. Major lending institutions have been bailed out by the government and fresh injections of capital have not been ruled out as the state continues to feed the system.
“The economy has gone through the equivalent of a massive heart attack,” says Liberal Democrat Shadow Chancellor Vince Cable, speaking at an Institute of Directors dinner in November 2009. “We’ve had bouts of flu but this time it’s a more serious attack to the system.” One of the biggest challenges, he warns, is the deficit created by this unique set of circumstances.
In his 2009 Budget, Chancellor Alistair Darling predicted that public borrowing in the current fiscal year would reach £175bn, or 12 per cent of GDP, but according to Roger Bootle, economic adviser to Deloitte, the figure could be as high as £200bn, or 15 per cent of GDP. This would be the highest level of borrowing since at least the Second World War and roughly double the level seen when the UK was forced to seek the support of the International Monetary Fund back in the mid-1970s.
The result will be one of the biggest tightenings of public finances for a generation, which will have a profound effect on the economy. The knock-on effect of spending cuts is likely to have a sharp impact on employment and incomes, which would put consumer-related firms and industries under pressure. The downward curve of public sector investment – the effect of which can be seen throughout the coming pages – will also play heavily on transport and infrastructure projects.
But the picture isn’t all bad. Fiscal stimulus has been a key tool in the government armoury during this recession and many observers believe more can be done to redress the balance. The widespread consensus, according to Bootle, is that drastic action is needed and the current fiscal position presents the authorities with a once-in-a-generation opportunity to remodel the UK economy and reduce its dependence on the state.
Manufacturing activity grew at its quickest pace in two years in October 2009 as orders rose at their fastest rate in almost six years and firms started to rebuild their stocks, according to a recent CIPS/Markit PMI survey. The stock market continues to make gains, with the FTSE increasing by 20 per cent in the third quarter of 2009, and house prices are on a similar upward trend.
So on the face of it the recovery is underway, but what form will it take? According to data from the International Monetary Fund (see table), the UK is expected to grow by just under 1 per cent in 2010 and 2.5 per cent in 2011, before flattening off to around 2.9 per cent in 2014. Most agree the upturn will be slow, as the public sector loses spending power, so attention is turning to the dynamism and aggression of private businesses.
The latest quarterly SME Trends survey from the CBI points to growing confidence among small businesses. While 40 per cent saw the volume of total new orders decline in the three months to October 2009, the balance of firms feeling more positive about the general business situation is the highest witnessed since April 2007. More companies are also upbeat about prospects for foreign exports, which is a key driver for recovery.
“The external sector recovery has been pretty lacklustre to date,” says Bootle. “Nevertheless the pound’s recent depreciation should in time lead to a decent pick-up in exports similar to that seen in the wake of the 1990s recession.
“Of course, not every economy can receive a boost to growth from net trade – but the UK seems to be well placed. While the global recovery will be relatively sluggish, growth looks set to be stronger in the UK’s export markets than in the UK itself.”
This is where we can gain competitive advantage. The development of high value products, and a strong knowledge economy, has created a politically underrated manufacturing base in the UK capable of supplying numerous global growth markets. Recent figures illustrate that the sector remains under pressure, but the long-term outlook is more positive. Companies with good quality products, operating in key foreign markets, including India and China, are part of that private sector dynamism needed to drag the UK back up the slope to growth.
“Most of the growth will come from private companies,” says Cable. “Whoever forms the next government will inherit this situation and it must provide an environment in which companies can make money.” He adds: “There is a depth of entrepreneurialism in the UK. There are a lot of companies growing with hi-tech products and innovative ideas that are going to provide the growth we will need.”