Reasons to be cheerful? Should we be talking the UK economy up, instead of down..?

Happold Consulting

15/01/2013 Written by: Jim Coleman No comments

I had the great pleasure this morning of presenting to the Forum for the Built Environment (http://www.fbeonline.co.uk/) on the topic of the UK economy and its future prospects. The event in London – one of several across the country taking place simultaneously – was rather ambitiously titled ‘Rally for Prosperity’. The objective was to start 2013 by talking things up and trying to focus on what is positive about the UK’s economic prospects despite the various constraints still pressing down on the nation’s businesses.  Not an easy task you might think, especially in light of some emerging evidence.

There is much discussion now of a ‘triple dip’ and the possibility that the last quarter of 2012 may have been one of negative growth. No official figures yet, but the NIESR (http://www.niesr.ac.uk/pdf/110113_144225.pdf) seem to think output may have contracted by 0.3% in the three months to December. A second quarter – i.e. the first of 2013 – following the same trend would indicate that we are well and truly back in recession. Consequently, we may end up dipping in and out of recession for a while to come.

Therefore the FBE’s directive to ‘think positive’ is timely. The UK economy in many respects has actually been quite resilient through the recession – certainly in comparison to our Eurozone neighbours. So maybe it’s time to start looking at the capacity of the economy to turn itself around. Alongside two other speakers – Ian Mason, Head of Policy at London Chamber of Commerce and Peter Swordy, Operations Manager at Wembley Stadium, I did my best to be positive.

A good place to start is the overall capacity of the economy and its ability generally to ‘bounce back’. This recession has been notable for the relatively low unemployment rate that has prevailed throughout the downturn. This may well be due to a tendency for businesses to hang on to people for as long as they can rather than initiate major redundancy programmes where these can be avoided. Of course in many instances that course of action has eventually become inevitable, but it has been surprising how the overall rate of unemployment hasn’t crept up further. This is not true for young people, however, where unemployment has indeed been a key feature of the recession.

The UK is of course now a service dominated economy and certainly in London many of these services are high value adding and based around creation and transfer of knowledge. Knowledge is embodied in people and therefore businesses need to try as far as they can to retain them. Perhaps this indicates an ability to pick up quickly if more liquidity can be eased back into the overall economic system – a challenge all of its own….. One downside of this ‘labour hoarding’ is the observation that our productivity levels are declining. Hopefully this is a temporary phenomenon that will right itself once output rises again.

Another major factor regarding our overall capacity for growth relates to the UK’s trade and export activity. Despite everything that has happened to our major trading partners, we seem to be loyally sticking with them. There are many reasons for this, including long term contract arrangements, cultural ties and embedded supply chains, but we are still doing most of trade with the USA and the larger Eurozone countries particularly France, Germany and Italy. These are all economies that have struggled over recent years, Germany notwithstanding. There is now tremendous opportunity for much greater expansion into rapidly developing global regions. We still do more trade with Ireland than we do with China or India and our trade with Brazil is hardly registering yet. Government needs to do more therefore to help businesses extend their reach into those regions that could provide a much needed boost back home.

Looking at London in particular - as per the FBE’s instructions – there is much to be positive about. The UK’s capital is still a great draw for international investment and despite national budgetary constraints, will see some major infrastructure improvements. Not least of these is Crossrail, which has the capacity to introduce some interesting new dynamics into the London economy and associated labour market. Specific locations such as Farringdon, Whitechapel and Custom House will start to look much more attractive as places for investment and value creation. On the aviation front, ‘Boris Island’ may be little more than an architectural rendering currently but it is very usefully forcing Government and the corporate community into a much needed debate about the future of hub airport capacity in the South East of the UK; this can only be a good thing.

There is also much to be positive about in the performance of some of our key industries. Financial and Business Services continue to diversify and innovate. Even the automotive sector is growing and evolving. In terms of volume of car production, the UK is almost back to its 1970s peak. It’s a game of two halves though – Honda announcing contraction, while Jaguar Land Rover initiates expansion. Again, it’s back to global markets. Honda’s production in the UK is mainly servicing a relatively depressed Eurozone market, while JLR is producing luxury-end vehicles that are shipped over to the Far East to be enjoyed by a burgeoning middle class. Even in the midst of a recession, creating a high value product and targeting it effectively at a well segmented market can work wonders.

This morning’s discussion focussed on many positives, as per the requirement, however there were inevitably a number of major caveats. It’s one thing to talk about the positives of the London economy and its impressive resilience, as if there is an easy read across to the rest of the UK economy. The same trends are not necessarily playing out uniformly around the country and regional disparities if anything may be getting worse. Saying that though, we did have a very interesting discussion about Aberdeen! A city that manages to continually create a lot of value and trade globally on the basis of some very niche and probably unique expertise.

Much to be positive about, but some Government levers still need to be pulled. In particular, we need to find better mechanisms to release investment funding into the economy both for businesses to invest in their operations and for individuals to invest particularly in property. Things are moving gradually in the right direction here but a little acceleration could help things along quite nicely.