In this first article of the year we review the drivers that are making 2014 look more promising for the economy and business growth generally. It seems that the majority view among UK businesses is that we are past the worst and looking forward to a better year.
Nb Notwithstanding this new found confidence, the one area that does not seem to be experiencing any form of uplift is SME business finance. More of this later, for now the good bits…..
1.Growth
There are numerous growth forecasts for the UK economy in 2014 from a wide range of government bodies, institutions and economists.
As good a start point as any is the independent Office of Budget Responsibility, set up by the coalition government to avoid political manipulation of these figures. Their forecast is as follows:
Growth in business investment to accelerate from 1.9% in 2013 to 6.1% in 2014
Growth in exports of goods and services to rise from 1.5% in 2013 to 4.4% in 2014
Growth in average earnings to accelerate from 1.4% to 2.7%
2.The views of Corporate Britain (Big cos)
The above growth forecasts are supported by the latest Deloitte Survey of UK Chief Financial Officers published this week. This is the 26th CFO survey and it shows how major UK corporates plan to navigate the risks and opportunities of 2014.
The survey was conducted between 22nd November and 9th December with 122 CFOs, including 32 at FTSE100 companies, taking part. These businesses account for 30% of the quoted UK equity market.
** The key finding in the survey is that a record 57% of CFOs say that this is a good time to take risk onto their balance sheet. A year ago this stood at 25%. Back in December 2008 the reading was just 1%.
* CFOs enter 2014 with increasing confidence. Business optimism is at a three-and-a-half-year high. Macro uncertainty and capital constraints, two of the big blocks to business activity, have receded.
* CFOs now attach a 16% probability to the UK falling back into recession in the next two years, down from 40% a year ago.
* The top priority for CFOs in 2014 is expansion. Capex is an increasing priority and 88% of CFOs expect M&A activity to increase over the next 12 months.
3.Business finance
* The Deloitte report says that the financing environment for big corporates is highly favourable. CFOs are more positive about financing their businesses with equities, bonds or bank borrowing than at any time in the last six years. In a sign that the banking system is working, at least for the big corporates in our survey, a record 80% of respondents say that bank credit offers an attractive source of finance. CFOs expect corporates to increase equity and debt issuance this year and to borrow more from the banks.
However as discussed in our recent article, access to business finance from the banks for the SME is proving as difficult to come by as ever.
4.Interest rates
Mark Carney is sending out strong messages that he plans to reduce the unemployment benchmark which was to be a signal for the increasing of our record low interest rates. With unemployment falling fast the previous 7% threshhold will soon be met and the suggestion is that that thei will be reduced to 6.5% to avoid an increase in rates that could potentially derail the recovery.
5.Business confidence
Lloyds Bank Commercial Banking Business in Britain report shows confidence in the wider economy and export prospects at a 20 year high.
This bi-annual report seeks the views of 1,500 UK businesses and shows that firms are continuing to grow in confidence, driven by expectations of stronger profits, orders and sales over the next six months.
The survey includes a Business Confidence Index which records businesses’ views of expected sales, orders and profits for the next six months and reports the overall “balance” of opinion, showing percentage of businesses with a positive outlook against those that are negative.
The latest report, shows that this index has increased by 15 points to 45 per cent, from 30 per cent in the July 2013 survey. This will be the fourth consecutive increase in the net balance of business confidence and is very close to the survey high of 46 per cent recorded in January 1994.
Is this turnaround of the UK economy sustainable?
It is my opinion that the UK turnaround, and this increasing confidence is based on increasing house prices and consumer spending. This is not the balanced recovery that we ideally want. Growth cannot be built on us consumers simply taking on increasing amounts of cheap (by historical standards) debt.
If the policy makers can address this over the next few years, probably by increasing interest rates, and getting the timing right such that we don’t lose the momentum of the recovery, I believe it is sustainable.
In my opinion the missing part of the turnaround strategy is the freeing up of SME business finance. Banks, including those under state ownership, remain highly circumspect when considering these funding opportunities.
There is funding available, but as I have stated previously in these articles, it is not necessarily from the banks, and applications for this finance need to be made in a way that creates competition among funders, and of course never gives any suggestion of desperation.
If you have any comments on this article or would like to discuss any aspect of it please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
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