‘Noflation’ trumping politics ahead of election

THE UK economy will continue to grow solidly in 2015 despite the political uncertainty of the general election on May 7, thanks to the boost provided by ultra-low inflation and an upturn in the Eurozone recovery.

This is according to the EY ITEM Club’s spring forecast, which points to the positive effects of low oil prices and falls in other commodity values, along with a strong pound importing low inflation, as reasons for the UK’s economic momentum.

However, another report by professional services firm Begbies Traynor says that North West businesses have held back on making significant financial decisions in the first quarter of 2015, possibly amid uncertainty over the forthcoming general election.

The latest Red Flag Alert report from Begbies indicates that although the latest Purchasing Managers Index from Markit Economics says that businesses across the region are growing at a steady rate, this did not trickle down to businesses facing financial difficulties, where the number of companies in significant and critical distress remained at the same level compared to Q4 of 2014.

Francesca Tackie, partner at Deansgate, Manchester-based Begbies Traynor, said: “Given rising business and consumer confidence, we would have expected to see fewer firms in trouble as the recovery gains momentum.

“But with uncertainty surrounding the general election, the economy in the North West appears to have paused for breath.”

Nevertheless, ITEM Club’s report said the benign environment for inflation is amplifying the benefits of high employment, boosting consumer confidence and allowing shoppers’ wallets to stretch further.
 
The added bonus to this favourable outlook, according to the forecast, will come from an increasingly robust recovery in the Eurozone.

The Eurozone recovery was already gathering steam before the start of Quantitative Easing and is now being reinforced by the European Central Bank’s (ECB) bond buying programme.

This strengthening recovery in the UK’s biggest export market should be enough to offset some of the negative effects of the strong pound on UK firms selling overseas.
 
As a result the EY ITEM Club expects GDP growth to reach 2.8% for 2015 and 3.0% for 2016, a much more positive outlook than forecast by the Office for Budget Responsibility alongside March’s Budget.
 
Peter Spencer, chief economic advisor to the ITEM Club said: “The economy is taking the general election in its stride as ‘noflation’ trumps politics. The Eurozone recovery is bedding in and completes the positive UK growth picture that we anticipate for 2015 and 2016.
 
“This is a mirror image of what we saw in 2010-12, when unemployment and inflation were high and Europe was in the doldrums.

“If the strength of the headwinds that held back the economy during the first years of the coalition is anything to go by, the tailwinds enjoyed by a new administration post May 7 should be strong enough to outweigh the effects of any political uncertainty.”
 
Mark Gregory, EY’s chief economist added: “With less than a month now until the election, the economy and businesses seem to be powering through relatively unscathed. Despite a softer performance from business investment in recent months, we’re likely to see the pace of spending by firms gather again later this year as companies hone their strategies to tap into buoyant consumer confidence.
 
“M&A activity is already picking up as companies look internationally for growth, with Europe attracting a lot of interest from the US, China and the UK.

“Meanwhile, businesses will be keeping a close eye on what impact the next government’s policies on public services spending, and Europe will have on their operations.”

EY, also known as Ernst & Young, is a global provider in assurance, tax, transaction and advisory services with offices throughout the UK, including Manchester, Liverpool, Leeds and Birmingham.

BEGBIES TRAYNOR – RED FLAG ALERT
 
NORTH WEST BUSINESSES WARY AHEAD OF THE NEXT GENERAL ELECTION
 
North West businesses held back on making significant financial decisions in the first quarter of 2015, possibly amid uncertainty over the forthcoming general election, the latest Red Flag Alert report from Begbies Traynor indicates.
 
Although the latest Purchasing Managers Index from Markit Economics indicates that businesses across the region are growing at a steady rate, this did not trickle down to businesses facing financial difficulties, where the number of companies in significant and critical distress remained at the same level compared to Q4 of 2014.
 
A two per cent rise in the number of companies experiencing significant financial difficulties in construction, which is often considered to be a good barometer for the economy, even suggests a slight worsening of difficulties.
 
Despite some reports indicating that sales have risen over the past few months, retailers in the region also struggled, with a two per cent rise in the number of companies facing significant financial problems. This was most prominent in Preston, where there has been a nine per cent increase in the number of retail businesses facing significant difficulties.
 
Francesca Tackie, partner at Deansgate-based Begbies Traynor, said: “Given rising business and consumer confidence, we would have expected to see fewer firms in trouble as the recovery gains momentum.
“But with uncertainty surrounding the general election, the economy in the North West appears to have paused for breath.
 
“Overall the number of companies in difficulty has only altered slightly in the first quarter of 2015, with 23,223 firms in significant and critical financial difficulties compared to 23,110 in Q4 of 2014.
 
“This lack of movement is something that has been noticed not only across the North West but UK wide, with the South West and South East also seeing no increase in the number of companies in critical and significant financial difficulty, and the North East and Yorkshire experiencing a one per cent rise and a one per cent drop respectively.
 
“Low inflation and fuel prices also mean that some companies have seen a rise in available cash flow. However, for those only just managing to get by, any rises in these factors could lead to increased pressure on margins over the next quarter.”
 
However, there have been variations across cities in the North West, with a 10 per cent rise in the number of construction firms in Manchester in significant difficulty, and Liverpool seeing 14 per cent fewer firms facing financial issues compared with the previous quarter.
 
Travel and tourism companies struggled the most during the first quarter of 2015, with a seven per cent increase in the number of firms in significant financial distress – the largest rise of any sector across the region.
 
Francesca added: “The current political landscape does create some uncertainty for companies.
 
“Owner-managers need to make sure that they are regularly referring to their business plan, which should realistically reflect the company’s growth prospects and financial situation, to make sure that they are growing at a realistic rate.
 
“Ensuring that there is adequate working capital within the business to deal with any unexpected issues is also vital, as sufficient cash, rather than profit, is important when operating in a challenging business environment.”
 
The Red Flag Alert report identifies the number of businesses facing financial problems and classifies them either as significant, defined as a court action or pending out-of date accounts, or critical – those with County Court judgements totalling £5,000 or more within a three-month period, a winding-up petition or those who have entered into a Company Voluntary Arrangement.