The Economic Outlook 2010/11

When Can We Expect Recovery?

Recently economists have become less optimistic concerning a quick recovery for the UK economy, acknowledging the problems are deep-seated.

The Background

Under Labour, the flourishing finance sector had compensated for the decline of traditional wealth-producing activities in the UK, such as manufacturing, fishing, coal mining, or energy production. Labour’s expansion of the public sector, particularly further education, helped minimise rising unemployment levels despite the background of a rising UK population.

The collapse of Lehman Bros in September 2008, and the subsequent fall in the credit supply acted as catalyst for the downturn in which the global economy shrunk by over 2%, despite strong growth in the emerging nations like China and India.

Like the entire western world, the UK private sector is now suffering high unemployment and frightening debt levels. Public debt has doubled in the last three years to unsustainable levels. Recent UK Governments have kept interest rates low, but have had little room for manoeuvre.

Like the Government, UK business leaders have had to focus on short-term survival tactics recently. Many optimists are pinning their hopes for 2010/11 on a genuine economic recovery, which will enable a return to ‘normal’ trading. The pessimists are not so sure!

So what are the options and expectations now?

Economic Options and Expectations for 2010/11

The new UK Government faces several dilemmas. It has selected key targets for cost-cutting, but there is the danger that reduced investment could trigger ‘double-dip’ recession. We cannot continue to live beyond our means for much longer. Another dilemma is sorting out the troubled banking sector, whilst keeping good levels of credit open for companies and individuals.

Some pessimists believe it is already too late and another credit crunch is inevitable, leading to the collapse of half of all private equity-owned companies in the UK and USA over the next five years. Certainly it is true that many of the fundamental problems that caused this recession are still with us.

Some experts say that UK PLC is like a failing company, lacking pro-active leaders who can develop strategies to gain control of events and establish profitability. In general the economic outlook makes grim reading:

Manufacturing and construction sectors have been hardest hit, and most public sector areas are also under attack.
The falling pound should have made exports a little easier, but exports are still declining.
BP was once Britain’s biggest company but its very existence is now under threat, with massive implications for the UK economy.
Wage increases for those in work are at a record low. Most private sector payrolls are struggling, with many workers on shorter hours for less pay, whilst others are working extra hours without pay.
UK unemployment is high and still rising. Forecasters have revised their expectations of 2010 unemployment figures in the UK to around 2.8 million.
Rising unemployment will prevent a repeat of surging house prices, which had advanced way beyond inflation. Property forecasts suggest it will be 2015 before property values recover.
Consumer confidence on both sides of the Atlantic is too low to drive a meaningful recovery over the coming months.
Ageing power stations ensure rising energy bills over the coming years, particularly electricity. Gas prices are likely to be steadied by the availability of liquid natural gas.
The increases in VAT and employment costs will create further distress.
The Bank of England has pledged to keep interest rates low in 2010.

When Can We Expect A Recovery?

There will be no quick panacea. Considerable damage has already occurred and quick V-shaped recovery is not realistic. The fall in UK GDP this year is expected to be around 4%.

Real recovery needs to be export-led or UK consumer-led. Unfortunately export orders for British goods fell in May 2010 at the fastest rate for a decade, despite the falling pound. Manufacturers are finding credit hard to obtain. Disappointing retail figures show that UK consumers cannot create anything substantial to aid the economic recovery.

The next few years will be painful, and recovery will be slow and difficult, at best.

Work Smarter, Streamline Your Business

If we are to survive, we must all learn to work smarter, or we will be putting our companies at risk. Company directors need to focus on long-term strategic advantage, as well as ensuring short-term survival tactics are working.

Smarter working techniques include business streamlining to develop and exploit competitive strengths and working to eliminate company ‘fat’. It also means investing more in science and technology, or ‘innovation’, to automate and transform traditional processes.

If you really want to work smarter, we can help.