Profit warnings on the rise: forecasting is tough in a changing economy.

I thought you said that things were getting better?

We all know that a week is a long time in politics, but what about economics? Only seven days after the EYITEM Club issued its upbeat Summer Forecast “The UK economy hits the sweet spot’, EY’s latest analysis shows that UK profit warnings reached their highest level for three years in the first half of 2014.  Surely some mistake? How can business decision-makers reconcile such apparently conflicting messages?

Well, some things are…but it is a complicated story…

The  EYITEM Club forecast set out the prospect of a balanced recovery in the UK with business investment surging and, in tandem with increased consumer spending, driving economic growth. With signs of moderation in the housing market, the UK economy is forecast to grow at over 3% in 2014 and prospects are strong for the following years.

However not everything is rosy: export performance, especially for goods, remains disappointing; real wages are not increasing in line with growth; and investment is still well below peak levels.   The UK economy is moving forward but has not yet recovered.

The UK economy is not just recovering, as I discussed previously, it is also changing. The low growth in real wages has undoubtedly helped to boost the numbers in employment but it has also changed the way in which consumers, especially those on lower incomes, approach their spending decisions. On the corporate side, as Chris Giles of the Financial Times so clearly explained (in a great set of graphics highlighting all the major economic changes since 2008), there has been a significant shift between sectors since 2008. Oil and the Extraction industries are down nearly 40% in real terms and Finance has fallen by around 15% but Professional Services are up close to 10%, the Communications sector has grown by 10%, Health by 15% and Administrative Services are 20% higher than in 2008.

…which helps to explain the rise in profit warnings…

When we delve into the detail underlying the EY Profit Warnings, the impact of the challenges and changes in the economy becomes clear.

Companies used three main reasons were used to explain why profit warnings were necessary:

  • currency movements were cited as accounting for 20% of all warnings in H1 2014;
  • competitive and pricing pressures, were the cause for 18% of all warnings in H1 2014 versus 5% a year earlier; and
  • increased expenditures on R&D and investment led to 10% of all warnings this year to date.

The key sectors making profit warnings were Consumer Goods and Services, Support Services and Industrials.

The UK economy’s strength has made life harder for exporters. Market expectations over a rise in interest rates, recognition of the improvements in the UK economy and the relative political stability of the UK have all combined to increase the rating of Sterling. The result has been a significant appreciation especially against many emerging market currencies such as those of Turkey, Thailand and India, and some gains against the US Dollar. The impact on the Consumer Sector and Support Services is clear as companies have found  their competitiveness under pressure, and even when they have been successful in their chosen markets, the conversion of international earnings into Sterling has been on less favourable terms than originally forecast.

Increased competitive and pricing pressures provide the perfect illustration of how the changing nature of the economy can impact corporate performance.

  • In the consumer market, a fall in real disposable incomes of something close to 10% since 2008 has partly been compensated for by more people in the workforce, reducing the impact on total consumer spending. However, lower real wages has been a significant factor in driving consumers to be more price conscious, which in turn has led to success for businesses targeting these segments.It is no surprise therefore to see  30 profit warnings from the Consumer sector overall in the first half of 2014.
  • We have also seen a large number of profit warnings from the Business to Business sectors this year to date, With a changing sectoral mix, the UK economy is now more weighted towards sectors with relatively lower value add per unit of output, consider Administrative Services compared to Financial Services as an example. In this changing environment, as in the consumer market, prices are subject to ever greater scrutiny and challenge and hence margins come under pressure too.

Finally, when we note that UK business investment slumped in the period after the financial crisis and is still 12% below peak levels according to EYITEM, it is no surprise that corporates are starting to incur increased costs as they increase output to respond to growing demand. The fact that these costs have been cited as reasons for profit warnings suggests they are short-term patches rather than long-term investment commitments.

…and provide a longer-term lesson

We can therefore reconcile an optimistic macro-economic outlook for the UK with an increase in profit warnings. The success of the UK economy is part of the reason for a strengthening pound and the changing nature of the UK economy, which is supporting the recovery, is creating new pressures on prices and costs. Nevertheless, there is also a case for arguing that business forecasting may not yet be fully attuned to the challenges of  a growing but changing economy. We have been through two distinct periods in recent economic history: up to 2008 when risk appears to have been underestimated; and 2009-2013 when risk aversion was the norm. As we move to growth mode, the challenge is to manage and price risk appropriately.

Companies require robust forecasts to support decision-making in the complex environment they are going to be operating in. This means:

  • an assessment of the external economic environment to identify the key trends and the potential scenarios which could impact how these key trends play out;
  • in-depth analysis of how the macro trends such as currency and real wage developments will impact their sector ;
  • mapping of the macro view to their business and financial models, using their own data to tailor the high level view.

Much has been made of  the potential of “Big Data’ but this may the moment when it really comes into its own. The companies with the best understanding of the complexities of the growing but changing economy stand to benefit most. The approach to forecasting and analytics will be a key building block of future success.

Could the “New Normal” become the “NICE Normal”? Time for an in-depth assessment of the opportunities in the UK economy.

This time it’s different…
When Professor Peter Spencer, Senior Economic Advisor to the EY ITEM Club, says that the UK labour market is behaving unlike any other labour market he has ever seen , it is clearly time to dive in and assess what is happening in the UK economy. Are we really be on the verge of a new economic paradigm? And what might this mean for business?
…and it could be very NICE…
In the period leading up to the financial crisis when the world economy seemed to be on an ever upward trajectory, the UK was described as experiencing a NICE (Non- Inflationary, Continuous Expansion) decade. This, as we now know, came to an end with a resounding thud. But there are now signs that a more lasting NICE period may be on the cards. The key messages from the EY ITEM Club UK Summer forecast are:
- the UK economy has moved from recovery to expansion mode, with growth of over 3% in 2014 and 2.5% on average thereafter;
- a more balanced UK economy with investment contributing a similar amount to growth as consumer spending;
- inflation below the 2%  Bank of England target and low inflationary expectations;
- no pressure for interest rate rises and little expectation of rates moving anywhere near to historic level when increases finally begin;
- businesses are currently able to cope with a strengthening sterling exchange rate, up over 12% year to date.
…as the economy has changed…
This is a different type of UK recovery. It began with growth in consumption driven by increasing numbers of people in employment rather than by  real wage rises. The UK labour supply has increased significantly in recent years as a result of people delaying retirement and working longer, success in reducing welfare claimants in certain parts of the market and immigration. Allied to reforms in labour market legislation over the last two decades, the UK now has a relatively flexible labour market in which people appear willing to remain in work rather than push for real wage increases. As the recovery has gathered speed so businesses have become more confident about the level of future demand and we have seen business investment pick up significantly in the last two quarters. This we are witnessing a more balanced domestic recovery with trade still lagging.
As a result the UK has now been able to return to close to the pre-crisis level of GDP despite a fall in overall productivity. GDP per Head and output per ahead are lower than in 2008 but more people in work means that total GDP has recovered. This has been achieved despite a significant fall in capital investment in the period since the financial crisis: the EY ITEM Club forecast suggests that investment is still 12.5% below peak levels.
Productivity and the labour market are only 2 aspects of a UK economy in transformation:
- EY’s UK Attractiveness Survey recently highlighted  the UK’s success in attracting Foreign Direct Investment: software investment was up 55% in 2013 and the UK led Europe in R&D investment;
- as the EYITEM Special Report on Services Exports demonstrates, the UK is a leader in services exports and this sector is poised for significant growth as the world economy recovers, UK services exports are much less dependent on Europe than our goods exports;
- the sectoral mix of the economy is shifting with professional and IT services growing very fast and the health, education and media sectors becoming more important relative to financial services and oil and gas;
- even some of the more worrying aspects of the recovery, such as the impact of low wage growth on the lower paid members of society, are creating opportunities as shown by the growth in discount retailers for example.
…creating opportunities in many areas…
There remains much more to do to secure the UK’s recovery and we should not be complacent, but relative to many of our competitors, the UK economy is in strong place. Business confidence in the strength of demand and general consumer confidence are back to pre-crisis levels and the UK is now a growing economy with competitive tax and labour market regimes. Foreign investors have shown their willingness to invest to support the transformation of the UK economy. This is a recovery build on strengthening domestic demand and while trade growth has so far disappointed, there is potential for trade to provide a future upside to domestic led growth.
…meaning businesses need to begin to take the recovery seriously…
After the severe economic shock which the UK experienced, it is unsurprising that businesses were reluctant to commit to future investment without being certain that the recovery had legs. This is now changing with a 10% year on year increase in business investment in the first quarter as more executives start to recognise the potential and relative attractiveness of the UK economy.
The key actions for businesses as they look to exploit the growing UK economy are:
- Evaluate the sectors, segments and geographies they operate in. Individual parts of the economy will develop in different ways so it is vital to understand the situation in each area of focus.
- Spend time working through what an increase in business investment will mean. Do you need to respond to match your competitors or does it mean your customers or suppliers will be investing?  For example, it is likely that there will be significant growth in IT investment as the economy transforms and grows but this may be in different ways to the past with mobile and cloud solutions to the fore, businesses must assess their readiness for technological change.
- Consider the scope to expand across the value chain, possibly substituting imports currently flowing into the UK in areas in which  domestic production capacity has declined.
- Revisit M&A. The value of M&A are now reaching pre-crisis levels, volumes are lower but corporates are increasingly willing to consider strategically important deals that offer synergies and consolidate competitors.;
- Don’t neglect Government. Public finances are still very challenged and the UK austerity drive continues. Ideas to transform the efficiency of Government delivery will continue to be important potential sources of future opportunity.
…to avoid missing out.
After many false dawns, scepticism is a natural response to claims that the economy is moving forward. However, the signs are promising and it does appear that the is change afoot beneath the headlines. Much needs to be done to ensure these improvements can be sustained and there remain challenges with youth unemployment, lack of wage growth and imbalances between the UK regions. But there is clearly opportunity in the recovery and businesses do need to assess their plans to ensure they are not missing out.

The UK services sector: blazing a trail for exports

Staying ahead in the global race: services exporters show the way

 When the UK government talks about rebalancing the economy from consumption to exports, most people think of manufacturing. But exports of services are every bit as effective a way of rebalancing, as the EY ITEM Club special report on exports shows.

Late last year, in our special report on UK exports overall, we noted that successful exporters target the right markets with a product offer at the right quality and price. This applies in services as well, with the proviso that the trade-off between quality and price is tilted more heavily in favour of quality. While price matters, it is our consistently high quality that has established the UK as a pre-eminent global centre for services. As with German manufactured goods, people buying British services feel they know what they’re going to get. As the report makes clear in Financial and Business Services the UK has a truly world class offer and all the signs are that this situation will continue as the world economy recovers.

But this doesn’t mean our services exporters can rest on their laurels. Like their counterparts in manufacturing, they need to pick their battles and be clear on where to compete.

This involves four steps:

Examine the potential markets for your services and identify those with the best growth prospects. China is an obvious example as it shifts towards a greater reliance on consumer spending for its future expansion.

Assess the competitiveness of your services in these markets. Can you sustain quality at the right price?

Examine the scope to differentiate your services in each market, including drawing on the strength of ‘Brand UK’ in services.

Identify any structural issues that might hinder your exports, such as local trade barriers or shortage of skills, and take steps to address these, perhaps including working with government.

In the global race for services exports, the UK is making great headway. But now is no time to ease off: in a competitive world, our services exporters need to keep raising their game — and their sights.

Rebalancing to the UK Regions: All roads lead to Manufacturing

Inward investment performance varies by region…

The coalition Government came to power determined to “Rebalance” the UK economy but EY’s 2013 UK Attractiveness Survey suggests that in terms of attracting inward investment to the English regions the policy has not been a success to date. Total Foreign Direct Investment (FDI) projects flowing to the UK  increased by 10% between 2010 and 2013, with the number of projects going to London increasing by over 30% and projects in Scotland, Northern Ireland and Wales  were up by over 60%, 50% and 25% respectively. But, by contrast, there were 20% less projects in the English regions in 2013 than in 2010.

The South East and East regions were the only two regions to increase projects in this 3 year period although the North West and West Midlands are on an upward curve and achieved close to their 2010 levels in 2013 and, along with the South East, remained in the top 3 English regions outside of London. However, the remainder of the English regions suffered a decline.

…with clear winners and losers…

The EY data on inward investment provides the basis to analyse long-term trends since 2004 in order to identify what factors drive the performance of inward investment into the UK regions. Over a ten-year period (2004-2013), four English regions, West Midlands, North West, South West, East Midlands, have seen their FDI project numbers increase and four, the South East, East, North East and Yorkshire, have seen project numbers fall. The South East seems to have suffered in comparison to London with a fall from 41 to 27 in the number of projects originated by investors from the USA, primarily as a result of a fall from 26 to 13 in the number of Software projects, many of which have gone to London. The other factor impacting the South East has been its loss of 11 of the 16 electronics and telecommunications projects it won in 2004.

The same appears to be true of the East: investments from the USA fell from 19 to 10 in the period, and software and electronics investments accounted for only 2 projects in 2013 compared to 21 in the peak year of 2005.The performance of the South East and East appears to be directly as a result of London’s emergence as a technology hub over the last decade. But what of the other regions?

The North West, South West and East Midlands are regions with a broad-based appeal to investors from different geographies across a range of sectors. All have a significant and reasonably stable base of projects from the USA and at least one European origin, usually France or Germany. Although the North West had a spike in Logistics investment in 2013, probably reflecting the contribution of good infrastructure and an international airport, this region and the South West have investment profiles that are similar to the profile of the UK as a whole and so are better able to cope with peaks and troughs in the market than less diversified regions. The East Midlands tends to attract a broad spread of manufacturing businesses which helps to smooth the peaks and troughs in individual sector investment.

By contrast, the North East and Yorkshire lack either a core investor or a strong set of core sectors. Both have seen investment from China and the USA collapse over the last decade and have suffered as their manufacturing base has weakened.The North East has benefitted from Japanese investment in the automotive sector but is now very dependent on this sector which accounted for 15 of its 23 projects in 2013.

The West Midlands has only grown its projects from 46 to 47 in the period, but is in many ways the region with the most interesting story. The relatively low overall growth masks a dramatic transformation with investment from the USA replaced by projects from Germany and India with an increase in automotive and food manufacturing replacing machinery and software as key sectors. The region appears to have real momentum and a solid base from which to move forward having effected a real transformation.

…which highlight the key drivers of success…

The performance  of Scotland, Northern Ireland and the more successful regions in England indicates that a diversified local economy, good infrastructure, including an effective international airport, and the pulling power of  a strong city are important drivers of success in attracting FDI. The poorer performing regions tend to have a limited core offer and no focal point, Yorkshire & Humber seems to suffer particularly from competition between a number of cities with no strong focus nor overall co-ordination. The examples of the West Midlands reshaping its offer around specific Manufacturing sectors, and the success of automotive in the North East hint at a way forward, potentially in sectors which were previously thought of as ones which the UK could not compete in.

…and a way forward with Manufacturing at the core.

Cutting through the messages, it is clear that the regions offer the opportunity to rebuild elements of the UK’s Manufacturing base. The good news is that there is currently an unprecedented opportunity in Manufacturing. There were 2,000 Manufacturing FDI projects in Europe last year and the UK captured a 12% share. Increasing the UK’s performance to its average share of FDI would attract an additional 80 projects a year and around 13,000 direct jobs and possibly half as many again indirectly supported positions, so a total of 20,000 a year.

Then there is the emerging Reshoring opportunity which is increasingly gaining attention. As China rebalances its economy and the world economy continues to change so Manufacturing is being reshaped. If the UK is to rebalance towards the regions then Manufacturing offers the best opportunity. Success will require:

  • Developing a strategy to exploit the strengths of the regions for Manufacturing, which, according to investors, are primarily in areas such as labour supply and wage rates and real estate costs, by identifying the sectors and origins which the UK could build a competitive position in,
  •  Increasing the awareness of exactly what the UK regions offer – investors currently are largely unaware of the attributes of the UK regions according to the EY survey and tend to form their view of the UK, based on their perception of London;
  • Improving the co-ordination of the offers,  and prioritize skills development and promotion of the regions -
  • Investing in infrastructure to make the regions accessible and better connected to the UK’s export markets; and
  • Identifying ways to leverage London’s strengths through partnerships with the regions.

Success could create relatively well paid, secure jobs outside of London and go a significant way to address some of the major challenges currently facing the UK economy and especially the desire to rebalance between London and the rest of the country.


The UK leads the European race for inward investment but challenges remain. Is Manufacturing the way forward?

2013 was an outstanding year for the UK…

The UK Government’s attempts to make the UK attractive to foreign investors are bearing fruit: in 2013, the UK attracted 799 FDI projects, its highest ever total and 20% of the European market according to EY’s 2013 UK Attractiveness Survey. This represents a 15% increase over 2012, high growth indeed when viewed against only 4% growth in Europe overall.

Investor perceptions also improved significantly. The UK moved from 8th to 5th in the global investor ranking of attractive locations over the next three years, moving past Germany. Only China, the USA, India and Brazil are ahead of the UK – an outstanding result. The UK is the leading destination in Europe for investment from the USA, India and Japan.

…with performance built on solid foundations…

The UK and Germany pulled ahead of the European pack in 2013, increasing their share of the European market as investors demonstrated  a clear preference for economic strength. In the EY survey, the UK scored over 80% approval in a range of features important to investors including stability of political climate, technology and telecommunications infrastructure and quality of life. Even in lower scoring areas such as labour costs and corporate taxation, the UK is regarded as significantly stronger than Germany.

And in London the UK has a jewel in the crown. If London was a country it would be fourth largest in Europe in terms of projects attracted. It is a hub for Software and Business Services investment and attracted 48% of all UK projects in 2013.

…facilitating a transformation of the economy’s sector mix…

This is not just a story of growth, it is also one of transformation: the UK is becoming a modern, knowledge based economy in the eyes of inward investors. Software projects in the UK surged by 55% in 2013 as the UK confirmed its dominance in this sector in Europe. London is seen as the only European city in the top 10 globally most likely to create the next Google. R&D was another success for the UK with 52 projects secured, a leading market share of 18% and representing 20% more projects than Germany.

…reflecting well on Government…

The UK Government deserves credit for enabling the improvement in the UK’s performance. 31% of investors feel the UK improved its financial flexibility and support for SMEs over the last year, 25% of investors identified improvements in taxation, 22% investment in industry initiatives and 21% support for trade missions over the last year. The success  in R&D owes something to the “Patent Box” policy and the UK’s leading share of HQ relocations has been helped by the reductions in corporate taxation.

…but there is more to do…

It may seem churlish to highlight weaknesses in such a stellar performance  but the UK cannot rest on its laurels. The market for inward investment is very competitive and so standing still is not an option. More importantly, there are several areas in which the UK can do better and must do better if it is to ensure the benefits of inward investment are felt by the whole country and can be used to address some of the UK’s most challenging economic problems.  The critical areas are:

  • The English regions have found it hard to maintain their performance in attracting inward investment and project numbers are down by 20% since 2010;
  • The UK achieves a 20% of European FDI but only 12% of Manufacturing projects and 6% of “new” manufacturing projects; and
  • The UK is overly reliant on investment from the USA and does need to broaden the geographic spread of origin of FDI.

To maintain and ideally improve the UK’s FDI performance a number of actions are essential:

  • Continuing to work to preserve the UK’s existing strengths such as taxation and political stability:
  • Confirming the UK’s status within Europe, leaving the EU will impact the UK’s ability to attract inward investment according to EY’s survey;
  • Working to attract R&D and incentivising innovation;
  • Increasing the awareness of the UK’s attributes especially amongst investors not currently in the UK; and
  • Examining ways to use London’s strength to benefit the country as a whole through joint propositions.

…and Manufacturing appears to offer real opportunity.

Looking beyond the narrow lens of FDI, while the UK economy is recovering challenges remain: London is growing faster than the rest of the country; real wages remain flat at best; and youth unemployment is at high levels. Boosting the UK’s share of European and global manufacturing appears to offer the best scope to create a major impact on the specific challenges highlighted above.  In 2013, more than 50% of all European FDI projects were Manufacturing originated, over 2,000 in total, creating 160 jobs per project on average compared to 18 for a typical Sales & Marketing project. Manufacturing offers the prospect of relatively well paid, skilled jobs, located outside of London and with the potential to train young workers. The UK should now raise its ambitions for FDI and put Manufacturing at the heart of its plans. More thoughts on this topic to follow in subsequent posts.

A new relationship between confidence and growth? “It’s confidence, but not as we know it”.


Economic confidence remains resilient…

The 10th EY Capital Confidence Barometer published on April 7th, based on a survey of over 1,600 executives worldwide, clearly demonstrates that business economic confidence is both strong and resilient, and has not been impacted significantly by economic and political shocks in the 6 months since the last survey. Fully 90% of respondents felt that the global economy was either improving or stable, compared to 89% in October 2013. There was a slight fall in those choosing Improving, down from 65% to 60%, but given recent shocks to the world economy, these results indicate that confidence is now well established and resilient to short-term shocks – certainly the mood is very different to the one at the height of the Eurozone crisis.

…and financial confidence has improved…

Even more strikingly, business confidence on key financial indicators has improved significantly over the last 6 months: 64% of businesses are confident about future earnings compared to 43% six months ago and there has been an increase of 21% in the number of businesses confident about valuations, now up to 50%. The results for financial indicators are the highest for several years and suggest that businesses now perceive the recovery to be broadening out and sustainable.

…but attitudes to growth remain cautious…

But global business leaders are not planning a major push for growth despite these high levels of confidence. When probed on their growth ambitions, the picture that emerges is of a cautious approach to expansion:

  • The same number of businesses (39%) are prioritising growth as those with a focus on cost reduction and operational improvement, the lowest share for growth since April 2012;
  • Only 29% expect to undertake M&A activity in the next 12 months, down from 35% in October; and
  • Only 30% expect to create jobs compared to 48% in October.


However, there are some positive signs with a clear shift towards more ambitious forms of organic growth: we estimate that 66% of organic activity is likely to be higher risk, a significant increase from 43% in October. Companies are more ambitious about their plan to enter new geographies and 15% identified R&D spending as a priority compared to 6% only 6 months ago. The sense is of businesses recognising the need to take risks to grow but with a desire to ensure this is measured, balanced and appropriate.

…with external influences playing a role…

It is unsurprising given the depth and length of the global financial crisis that business confidence is not translating into a push for rapid expansion but other factors are at play. The CCB identifies that shareholder activism is impacting the boardroom agenda. When asked how shareholder activism had impacted the boardroom agenda, 49% said it had pushed cost reduction higher and 24% identified higher dividend payments and 23% divestments as other areas that had been prioritised as a result. By contrast only 11% suggested it had led to a greater focus on acquisitions. There does appear to be evidence that increased pressure on boards and management has led to a shift towards lower risk activities further dampening the momentum for growth.

…and the risk-reward equation is attracting more attention…

The survey also suggests that business leaders have changed their perspective on the relative attractiveness and riskiness of different regions of the world. Political risk is cited by 32% of respondents as the most significant risk to global growth, just ahead of a slowdown in emerging markets at 29%. Only 12% cite the Eurozone and 7% inflation. Business is more confident that the world is going to grow but also more aware that growth will not be at the rates seen before the financial crisis and that there are risks associated with chasing higher growth.

…so its steady as it goes with a shift to quality and impact.

Business leaders globally are confident about the economic outlook but this is a different economic outlook than the one that formed the basis of accepted wisdom before the financial crisis. Today’s business leaders are basing their plans around a global economy that is expected to grow more slowly than the pre-crisis trend, with growth more balanced between developed and developing markets and with greater volatility. They also have a greater awareness of risk and recognise the need to balance risk and return. The result is a more measured and conservative approach to expansion than the high levels of confidence would suggest: capital will be allocated between various uses based on a more considered analysis of the benefits and risks.

The CCB suggests a greater allocation of resources to organic growth and margin improvement than in the boom period, and a more balanced geographic portfolio with an increased allocation of capital to developed markets. Most strikingly as identified by EY’s Global Transactions leader, Pip McCrostie, deal making will be concentrated on larger, high quality strategic deals with the capability to transform business prospects. We are entering a new era.


Steady growth and low inflation – is your business ready?

The  EY ITEM Club is predicting strong growth…

The UK economy is set to grow at 2.9% in 2014 according to the  EY ITEM Club Spring forecast: the strongest rate of growth since the financial crisis. The drivers of the recovery to date, consumer spending and the housing market, will increasingly be supported by an increase in business investment, forecast to grow at 8 to 9% a year over the next 4 years.

…and low inflation…

But this is not a typical UK recovery. With increased labour supply as a result of delayed retirement and welfare to work, lower import costs due to the strong pound and reduced commodity costs as a result of weaker global demand, the UK is set for a low inflation expansion, with CPI forecast to remain below the 2% Bank of England target until 2017. Growing investment will drive higher productivity and create further downward pressure on inflation.

…creating a positive environment for business.

The EY ITEM Club forecast cites a number of business surveys on expected profitability, investment intentions and recruitment, all of which support the view that the recovery is gathering momentum. The key elements of the forecast that businesses should focus on are:

  • Strong and sustained growth;
  • Increased investment;
  • A recovering world market, including several UK target markets;
  • Low inflation and interest rates; and
  • A booming labour market.

Make sure your business model is aligned for growth…

The  EY ITEM Club forecast predicts growing demand in the UK and internationally. This upturn will create opportunities but also raise challenges that businesses will need to respond to. An integrated strategy will be required to ensure the opportunity for profitable growth can be exploited successfully.

In recent years, companies have concentrated on doing what it takes to survive in a very difficult economy. With economic growth but subdued inflation, survival centric business models will need to change. In particular:

  • A low inflationary environment is likely to make it difficult to raise end-user prices in a number of sectors, as an example, the February UK Retail Sales data revealed the pressure on retailers with clothing prices falling 11%;
  • The labour market appears to be heating up and EY ITEM Club expect pay settlements to accelerate and for average earnings to run ahead of inflation; and
  • A buoyant labour market may also mean there will be a war for talent and possible shortages across a range of skill sets.

Now is the time to undertake a review of the business model to ensure that the business is able to grow and generate returns in future. The 10th EY Capital Confidence Barometer released on April 7th shows how leading companies are reviewing their geographic portfolios and adjusting the balance of effort between cost reduction, organic growth and inorganic expansion.

…as there are opportunities…

The EY ITEM Club forecast identifies a number of opportunities for business:

  • Exporters can expect continuing growth in China, a boost from the strong performance of the USA and even  a return to positive GDP movements in the Eurozone;
  • Business to business suppliers should ensure they are positioned to exploit the opportunities that the expected acceleration in business investment will create;
  • Companies selling to consumers should benefit from rising disposable income and while consumer spending is not forecast to race away, steady growth of around 2% per year is too good to miss;
  • Although Government spending will remain under pressure, the targets that have been set to increase employment and to continue to improve the quality and efficiency of the delivery of public services, mean that there will be opportunities for innovative businesses to benefit.


…that require attention now.

Companies have generally focused on survival and good housekeeping in recent years and have been rewarded for this. With confidence rising, growth prospects more positive, cash on the balance sheet and increased availability of finance, all the conditions are in place for sustained and low inflationary, if unspectacular, growth. There remain risks and close monitoring is required especially of key indicators such as business investment, exports and house prices and mortgage to income ratios. However, this outlook is as good as it is likely to get and delaying too long may mean either that opportunities are lost to others or become more expensive to pursue in future.


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