What next for business in 2010?
Posted by Barrie Kelly on Tuesday 12 January 2010
David Kern, Chief Economist for the British Chambers of Commerce looks at what lies in store for the UK economy in 2010.
The UK is emerging from one of the most turbulent economic periods in recent history. The good news? It is moving in the right direction and 2010 will be a better year both for the economy and British businesses.
However, ensuring that recovery is both achievable and sustainable will require some careful judgement and will involve some difficult decisions, says David Kern, Chief Economist for the British Chambers of Commerce.
“2010 will be a difficult year but it will be a better year than 2009. The economy will recover, but sustaining the recovery will require a lot of judgement and much will depend on allowing businesses to progress and invest. That will be the critical element making recovery possible.
“We have experienced a very deep recession and we can’t predict exactly when it will end. But it is certainly the case that the economy will soon return to growth in 2010 and it is likely that the fourth quarter of 2009 will be seen as the first quarter of recovery.
“The major challenge facing the economy is that the recovery depends so far on a big injection of stimulus. The Government has already cut interest rates to almost zero and the Quantitative Easing programme has led to an increase in the amount of money in circulation, but that also means a deficit in the public finances. Some of these stimuli will have to be gradually withdrawn and the big uncertainty is how the economy would cope with that situation.
“The BCC has warned that the Government deficit will have to be cut in the next few years. While we agree with the need for stimulus measures, over the medium term, public finances will have to be brought back into order. Without that, the international credibility of the UK will not be viable.
In order to reduce the current deficit the Government will have to get its finances back in the black. While the main method of doing this must be an increase in taxation, the BCC believes that higher taxes would be undesirable and that higher business tax should be avoided at all costs
“The reduction in the deficit must primarily be achieved by a reduction in public spending. The Government must minimise tax increases and must at all costs avoid higher taxes on businesses. The BCC considers some of the taxes already being planned to be damaging and we would argue that they should not be implemented.
“For example, it has already been announced that in 2011 National Insurance contributions will be increased and we believe that such an increase would be damaging. The public sector must be scaled down and there is an argument for freezing public sector pay.
“Only business can get the economy out of recession because business creates wealth. Therefore the very difficult job of cutting the budget deficit and bringing public finances back into stability must be done without damaging the very businesses that we will rely on to bring the economy back into growth. That is why it is essential that the Government has a plan to achieve this and starts implementing it as soon as the recession is at an end.”
The UK has enjoyed a long period of extremely low interest rates but rates could start edging up during 2010 as the economy recovers.
David Kern says: “Interest rates will have to rise, but slowly. My forecast is that rates will have to stay at the present very low levels for six to nine months, so the first rise in interest rates is likely to occur in Quarter three of 2010. The precise timing will be decided by the state of the economy after the middle of the year.”
The Quantitative Easing policy that pumped billions of pounds into the economy will also need to be gradually scaled down.
“Slowly, we will have to withdraw the injection of money into the economy, but what we must avoid is a double dip recession where the economy would start to recover for two or three quarters and then go back down again.
“The challenge is significant. The economy was on the point of collapse in 2008, as was the banking system, and the Government had to plug a big hole in our finances and take on a huge debt. Now the huge stimulus has to be scaled back but it is very important that, in order to do it, they don’t hit businesses.”
The previous boom was fuelled largely by a significant increase in debt and in consumer spending, which is unlikely to happen again in the near future.
“We know that in the next cycle consumer spending will not increase as much as it did in the boom but we don’t want a recovery that depends as much on consumer debt and on Government debt. In the next economic cycle the UK will have to rely more on export and investment, less on the Government and less on the consumer. We have to rebalance the economy.”
David Kern believes the value of the pound is unlikely to move up or down significantly.
“The pound is relatively well placed where it is now. It is competitive and I don’t think it needs to fall much more, or rise much more. If it falls much further it could be seen as be a vote of no confidence in the UK economy, but the value of the pound is certainly not blocking our recovery.
“What is important is that the Government, for the time being, suspends labour market regulations, which are an obstacle to business growth.
“Bank lending to business, in particular small and medium size enterprises, is also a problem at the moment and many businesses are finding it hard to access finance. Anecdotal evidence suggests that there are good businesses that cannot get lending and while it is not a crisis, we have to be vigilant.”
The message from the BCC is clear: only business can lead the economy out of recession but it must be given the opportunity to do so.
“In the normal spectrum of economic activity, private equity, risk and innovation stimulate business growth. Once we move out of decline and into growth, these things happen. Government must nourish the recovery and not be an obstacle to growth. We must make sure that businesses are not hampered by lack of finance, labour market regulations and further taxation.”
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