E&Y forecasts tough year ahead then export-led growth

ECONOMISTS today forecast a tough 2010 for business but with the promise of an export-led recovery for 2011 and beyond.

In its spring forecast, published today, Ernst & Young ITEM Club said the conditions were right for companies to take advantage of spare capacity and a weak pound to drive export growth, especially in Asia.

It has forecast that while business investment is likely to fall back by another 6.5% this year – after falling by more than 19% last year – the situation will be reversed by 2011 with investment rising sharply to 10% and then 14% the year after.

In a statement to accompany the forecast, the ITEM Club said world output and trade were now recovering rapidly and signs of this were already being seen with a strengthening of export orders and deliveries, building on the rebound in the second half of last year.

The ITEM Club said it maintained the view that exports and other sources of overseas income would lead the economy through the recovery phase as markets in the United States and the Asian countries continued to strengthen.

Adrian Cooper, economic advisor to the ITEM Club, said in an exclusive interview with TheBusinessDesk.com: “It’s a relatively positive picture we’re painting.”

He said this was partly a reflection of the pick-up in global markets and the markets in which UK companies are selling.

“It’s also a reflection of the relatively strong cash position companies outside the banking sector find themselves in. These companies have good financing and they’re looking for growth,” he said.

“They are also being helped by the fluctuating exchange rate, which means the UK is at the most competitive it’s been for several decades.”

These were the ideal conditions in which companies could develop their exports and grow their way out of recession, he added.

“The continued problems in the home market provide a stick for that carrot – UK companies are effectively being pushed into the export markets,” he said.

[VIDEO: 95]

His comments were supported by Ernst & Young’s senior partner in Birmingham, Ronnie Bowker.

He said: “Given the strong manufacturing base in the region there are opportunities for growth through sales. The weakness of the pound will help many firms in the West Midlands with their export drives.”

However, he said that the growth had to be seen in context.

“Given the sharp contraction of the last 18 months any growth is good but it has to be seen from the context of a very low base.

“Nevertheless, as volumes increase that should start to feed through to the bottom line,” he said.

Mr Bowker said there was spare capacity at the moment in terms of idle machinery meaning if companies could get the workers they needed then they were in an ideal position in which to push for growth – provided they had the necessary working capital.

“The road to recovery is difficult and many firms are just bumping along at the bottom at the moment, but if they can ride out the rest of this year then they should be in good shape,” he added.

Peter Spencer, the ITEM Club’s chief economic adviser, said an export-led recovery was really a growth story for the UK from 2011 onwards, not for this year, as world trade was not likely to regain its 2008 peak until the end of 2011.

“The immediate prospects for the economy remain dismal and we still think that the UK will struggle to achieve 1% growth this year,” he said.

He said the Treasury forecasts were unreliable as it had based its policy on a presumed bounce-back in the home market, driven by consumer spending.

“We remain concerned the Treasury’s forecast lacks precision. It is dependent upon a strong revival in domestic demand over the next two to three years, which appears unlikely in the current circumstances,” said Mr Spencer.

Rising debt levels, a squeeze on household incomes, inflation fears and worries about unemployment were all weakening consumer spending, he said.

As to the future success of the economy, the ITEM Club said a lot would depend on the outcome of the election.

“The next government will be negotiating uncharted waters,” said Mr Spencer.

“It is hard to find a precedent for a situation in which companies are so strong and consumer so weak. Exports provide an opportunity to steer our way out of this situation, but ultimately business must put its shoulder to the wheel.

“This support is likely to be delayed by the under-utilisation of resources in the economy, but the charts begin to look promising for 2011 and beyond.”