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Confidence - Global Economics Weekly

Confidence

Global Economics Weekly Brief


Confidence is up amongst some UK firms. Profitability and the prospects for investment are improving – more positive news for the UK recovery. But it’s not all hunky-dory.



The export sector is struggling and house-building is not fully fit and stagnation is here again. The UK economy is not quite the well-oiled machine that is the German national football team at present!

Primed for growth. The latest survey of UK Chief Financial Officers (CFOs) reveals the largest companies are in expansion mode. CFOs are attaching less weight to defensive strategies - like cost control and debt reduction - than at any point in the last four years. It’s good news for investment and jobs growth. CFOs’ top concerns are currently political, including the uncertainty around the general election and the possibility of an EU referendum, rather than economic and financial. They are also relatively relaxed about the outlook for the Bank Rate, expecting roughly two rate hikes by this time next year. Times are still tuff globally!

A bigger bang. And it’s not just increased confidence. UK non-financial firms are slowly restoring profitability to pre-crisis levels. The rate of return on capital was 11.9% in Q1 this year, or almost 12p profit for every £1 of capital invested. It had dipped as low as 10p in 2009, so the trend is upwards. Investors are seeing a bigger bang for their capital buck. That's good news for investors and for employees too, as jobs tend to follow profits. Less welcome among the bulk of Britain's workers is evidence that the share of profits flowing to employees through their wages is falling. Shareholders/Directors are benefiting at the expense of the employees again!

Down but not out. House prices rose over the three months to June, but at a slightly slower pace than the three months to May, according to the Royal Institution of Chartered Surveyors. Three factors probably account for the general increase in caution: the tightening in mortgage underwriting standards; rate hike speculation; and tough talk from the Bank of England about housing market risks. But let's not go over the top. The headline index reading of 53 is still consistent with solid price momentum and the sales-to-stocks ratio – a reliable indicator of future price trends – rose to its highest level since 2007. What are the future opportunities?

Static construction. Those hoping for a summer renaissance in new house building (i.e., almost everyone) will be a touch disappointed. Yes, new housing construction is up by almost 20% on last year. But it barely moved from April to May, rising by 1.1%, and that was due to public sector building. It looks like private sector new starts in Q2 will be about the same as in Q1. This is around 80% of the amount in 2007, which itself was reckoned to be insufficient to bring balance to housing demand and supply. So although prices can continue to rise in the near-term, long-term stability in the housing market recovery would be better served by building more homes. Boom and bust around the corner again!

The waiting game. Total UK exports of goods and services fell by over 4% in May compared to the same month last year - the seventh consecutive monthly drop. Even when oil and other erratic items are excluded the picture doesn't look much better. The stronger pound, which makes exports expensive, may partly explain it, though the UK has longstanding issues with competitiveness. And demand remains weak. The volume of world trade is growing at roughly one-third of its pre-crisis pace, with many of the UK’s traditional export markets still in slow-growth mode. Global slowdown is here again!

No cash back. Exports of goods and services is a major component of the 'current account' which seeks to capture a country's overall trade picture with the rest of the world. The UK persistently runs a deficit but in recent years it has deteriorated sharply. The shortfall in 2013 was the largest since 1989. Our trade in goods and services is not the problem - the deficit here is not as deep as it was pre-crisis. But in recent years there has been a significant drop in the income we receive from investments in overseas bonds and shares. It’s a sign that many parts of the world are not enjoying the same strong recovery that the UK is. A stronger pick-up in growth, most notably in the eurozone, would do a lot of good. Global slowdown is here again!

Squad rotation. The Bank of England's Monetary Policy Committee (MPC) kept interest rates at their record low of 0.5% again this month, but changes are occurring beneath the surface. There have been three personnel changes to the nine-member MPC in recent months. So far the decisions have stayed the same but next month’s inflation report will be the first opportunity to see if the new members have altered the committee's thinking on the big issues facing UK monetary policy, namely the timing and pace of interest rate hikes. Will interest rates rise and if so when?

Talking tactics. Minutes from the Federal Reserve's last rate-setting committee revealed that much of the discussion was not about the current state of the economy, but future tactics instead. In particular, the Fed discussed its options for how to normalise monetary policy, i.e. what to do with quantitative easing when interest rates begin to rise. Unfortunately no consensus was achieved. Sometimes more information doesn’t make things clearer!


About the Author Colin Thompson

Colin is a former successful Managing Director of Transactional/Document Manufacturing Plants, Document Management/Workflow Solutions companies and other organisations, former Group Chairman of the Academy for Chief Executives, Non-Executive Director, Mentor - RFU Leadership Academy, Mentor - Coventry University, Mentor - The Chartered Institute of Personnel and Development, author/writer Business Advice Section for IPEX, Graphic Display World, NewsUSA, GraphicStart, many others globally, helping companies raise their `bottom-line` and `increase cash flow`. Plus, helping individuals to be successful in business and life in general. Author of several publications, research reports, guides, business and educational models on CD-ROM/Software/PDF and over 2000 articles and 35 books published on business and educational subjects worldwide. Plus, International Speaker/Visiting University Professor.

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Written and submitted by:

Dr Colin Thompson
Managing Partner
Direct: + 44 (0) 121 247 4589
Mobile: 07831 588310
Office: + 44 (0) 121 244 1802
email: colin@cavendish-mr.org.uk
Skype: colin.thompson384


http://www.cavendish-mr.org.uk

The Cavendish Academy
http://www.linkedin.com/e/-tc85tw-gbkla9w4-1f/vgh/3212542/
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Confidence
- Global Economics Weekly

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