Going for gold
BUSINESS sentiment, forecasts, confidence, optimism - for decades, it has been common for low single-figure per cent GDP growth forecasts to conflict with corporate earnings estimates in the teens. There are many reasons for this perennial gulf, but most agree that belief in success is crucial to achieving the best possible big-picture result.
The UK government insists there is all to play for post-Brexit. Cool Britannia 2.0 looms as we redefine our position on the world stage. As we often point out, there is inspiration to be found from the world of sport. Five months ahead of the Tokyo Olympics, Team GB believes it can improve on the 67 medals won at Rio 2016, when it took second place in the final table. Despite lower expectations from our previously world-leading rowers and cyclists, the highest forecast for medals is more than 90. It’s a similar story for England’s football team. After breaking goalscoring records in Euro 2020 qualification, they are now 4/1 favourite to win - assuming captain and top scorer Harry Kane returns to peak fitness.
Optimism and positivity cost businesses nothing and present no downside after three-and-a-half years of delayed investment decisions, uncertainty and low confidence. One business psychologist suggests that if CEOs were Disney characters, then Olaf (from Frozen), Happy (from Snow White), Russell the Boy Scout (from Up) and Baloo (from The Jungle Book) would be more successful than Iago (from Aladdin), Grumpy (from Snow White) or Phil the Faun (from Hercules). Why? An optimistic attitude opens doors and provides motivation, fortitude, and resilience - important personality traits for any leader of a growing business.
Talking up the High Street
After what the retail industry has called the worst year on record, analysts think the only way is up for the sector. Setting aside the ‘Amazon factor’ driving shoppers away from the High Street, as well as painful business rates for retailers, consumer confidence is generally expected to benefit from wage growth outstripping inflation. Of course, one driver of low prices has been severe discounting by stricken retail groups. Nonetheless, recovery is expected to begin in 2020 and a major factor could be the positive side of digital innovation, which so far has only kept consumers online.
New 5G wireless technology will inevitably lead to short term job losses, as fewer cash desk staff are required; but improving stock efficiencies and eliminating queues at checkouts are expected to boost sales, according to 400 retailers surveyed by research house Altus. The same store bosses say 5G will allow them to use both augmented reality and virtual reality to enhance the customer experience, which is crucial to bringing online shoppers back to physical outlets. Their optimism for jobs in the long term is hard to square with the 60% of existing stock control workers that the Office for National Statistics (ONS) believes could lose out to new technology. In the first six weeks of 2020, more than 11,000 jobs have gone from UK retail, partly from high profile closures at Debenhams, Beales and Mothercare. This year may well end better than 2019, but the High Street faces more pain.
Boris Bounce for house prices
The Prime Minister loves to alliterate his name. First was the Boris Bike, when he was London mayor; then the Boris Bridge, which could connect Britain with Northern Ireland; now the Boris Bounce, which is readily applied to newfound optimism following December’s general election. House prices are presently enjoying this association, rising across the UK in January for the first time in 18 months.
The Royal Institution of Chartered Surveyors (RICS) says enquiries from would-be buyers, agreed sales and the number of properties coming on the market all rose in January.A net balance of 17% of surveyors and estate agents, which measures the difference between those reporting increases and those seeing decreases, reported higher prices in January, the first time this measure has been positive since July 2018. It was -2% in December 2019. Prices rose in London and the South East, where they have been falling in recent years, while Northern Ireland and Scotland showed the strongest price growth. The Nationwide building society, which reported house price growth at a 14-month high in January, sees a flat outturn for 2020 as a whole. Despite the optimism, the top end of the market still looks tough. Overall, 56% of agents reported sales prices well below the asking price last month.
Economic Outlook
New Chancellor Rishi Sunak may have landed just in time to preside over a tentative recovery in the UK’s economic fortunes. Two immediate changes are clear: what had been planned as Sajid Javid’s first budget will almost certainly be delayed as No.11’s new occupant settles in; furthermore, Javid’s expectation of balancing the budget for current (day-to-day) spending by 2023 will also be delayed as Sunak falls into line with the PM’s thinking on greater spending, apparently on investment projects only.
Markets and business will be waiting impatiently for early indications of progress in the economy. Growth flatlined in the last three months of the financial year as the UK was gripped by political paralysis over Brexit. Gross domestic product (GDP) for Q4 2019 was flat on the previous quarter, bringing the 2019 rise to 1.4%, according to the Office for National Statistics (ONS). Higher than the 1.3% growth in 2018, but still one of the slowest years since the financial crisis.The flat last quarter saw increases in the services and construction sectors offset by another poor showing from manufacturing, particularly the motor industry.
Keeping interest rates on hold at 0.75%, the Bank of England’s Monetary Policy Committee (MPC) remains cautious, estimating that Britain’s economy would be able to grow at only an average rate of 1.1 per cent over the next three years without sparking damaging inflationary pressure. This is less than half former chancellor Javid’s ambition of boosting the growth rate towards 2.8%. The MPC expects the current base rate to allow inflation rising gently up to its 2% target within three years. As ever, grass roots growth among smaller and medium enterprises (SMEs) will be critical in building sustainable growth. Chancellor Sunak will not be allowed to abandon Javid’s election commitment to helping smaller businesses to thrive. That means a pro-business free trade agreement with the EU and nations beyond and an end to the debilitating impact of late payments, which almost doubled to £20 billion in 2019.
The China effect
Beyond these shores, the coronavirus has already taken its toll on world trade. The effects of a major non-financial event in China bring into sharp focus how the rest of the world, not least the UK, has in just a few years become hugely dependant on what is now the second largest economy and largest consumer market. Daniel Zhang, the boss of China’s biggest listed company, Alibaba, has described the coronavirus outbreak as a potential “black swan” effect that could derail the global economy.One key example of how the impact is jarring some of the biggest cogs in the global economic machine: the International Energy Agency expects demand for oil to fall by 435,000 barrels per day for the first three months of the year compared with the last - the first quarterly contraction since the financial crisis more than a decade ago.
At home, JCB, the British digger maker, has cut working hours and suspended overtime for 4,000 UK employees after the coronavirus outbreak prompted a shortage in parts coming from China.More than 25% of JCB’s suppliers in China remain closed and those that have reopened are working at reduced capacity and are struggling to make shipments. For hundreds of UK businesses, large and small, the inbound supply of components from Chinese partners will be disrupted in the coming weeks as stocks are replenishedThe lack of visibility regarding Chinese revenues is expected to be felt so widely among UK businesses that the Financial Reporting Council (FRC) has already opened talks with major audit firms about possible delays to signing off clients' accounts.
A glimpse of the future for exports
Even the most ardent Remainers in the business world are beginning to recognise an opportunity arising from Brexit and preparing to be surprised by the potential for exports. Our research partner, Gibson Index (GI) has a unique helicopter view of the grass roots economy, tracking around 70,000 SMEs since 2003. Thousands of news stories submitted by these companies to GI in the 44 months following the referendum have reported deals signed in markets outside the EU. They show, encouragingly, that these smaller businesses - contributing more than 50% of UK GDP - may be leading the switch in the UK’s strategic trading pattern away from the EU to new sales in the ‘Big Three’ high growth markets of the world: North America, Middle East and south Asia.
The ONS confirms that exports are growing ‘faster than at any time since records began’. Last year UK exports to Nigeria rose 27% and those to India leapt 24%, with Thailand up 19% and Taiwan 18%. They doubled in countries such as Oman and Macedonia. Exports to distant Kazakhstan climbed to $2bn, only slightly less than the UK’s exports to Austria. In addition to formal export figures can be added £2bn of export sales delivered by small independent UK businesses via Amazon, plus the sales of 200,000 UK micro SMEs that export via eBay. Leading the export charge have been food and drink products. The Food & Drink Federation says a rapid expansion in food exports to China will mean ‘it will create by 2024 a market 50% larger than the whole of Europe’. Over the past year, total exports of UK food and drink reached a record £22.5 billion. Interestingly it is not the relatively rich South East of England taking the lead – Wales, the East Midlands and the North West are the top regions for growth. The number of Welsh SMEs exporting has doubled in just two years to 4,500.
Beyond the export success saga there may be much to celebrate elsewhere in the UK economy. New rich oilfields to the west of Scotland are coming on stream. A surge in investment in City fintech startups reached £15bn last year. Manufacturing sectors once thought lost forever to Asia – toys, consumer goods, electronics – are seeing a revival.
This ‘Brexit Boom’ is unlikely to see much of a fall in UK-EU trade, but it could witness a spectacular surge in exports to the rest of the world. In time, history may come to view the Brexit boom as being more important than Brexit itself.
Buchler Phillips is a corporate recovery and restructuring firm, dealing also with complex turnaround and fraud assignments in a wide variety of sectors. Please view our website www.buchlerphillips.com for more information.
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