Overseas demand to play vital role in recovery
ECONOMIC recovery is likely to be driven by exports but the overall outlook for the rest of 2010 “remains poor”, according to the latest Ernst & Young ITEM Club quarterly forecast.
Professor Peter Spencer, at the University of York and chief economic advisor to the Ernst & Young ITEM Club, said: “There are good reasons to be optimistic about exports and overseas demand.
“The competitive pound provides the carrot and the weak home market provides the stick. The lack of domestic growth opportunities will force exporters and other organisations to seek overseas income streams, particularly in Asia, while the weak pound makes UK output extremely competitive.
“The longer this situation continues the more obvious it will become that this is the way forward, both for businesses and the macroeconomy.”
ITEM Club maintains its view that exports and other sources of overseas income will lead the economy through the recovery phase as US and Asian markets continue to strengthen.
However, ITEM said that an export-led recovery would become more of a “growth story” for the UK from 2011 onwards, not for this year.
“The immediate prospects for the economy remain dismal and we still think that the UK will struggle to achieve 1% growth this year,” said Prof Spencer.
ITEM said consumer spending was too weak to sustain a recovery.
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.
To view Mr Cooper’s interview, click here:
[VIDEO: 95]
According to ITEM Club, household debt rose from 100% to 160% of disposable income from 2000 to 2007. While disposable incomes were boosted last year by the sharp decline in interest rates, this effect will disappear this year since interest rates cannot fall any further.
With wage growth likely to remain subdued, pressures will intensify this year leaving real disposable incomes flat. ITEM expects an increase in consumer spending of just 0.5% this year.
Prof Spencer said it would give a welcome fillip to the economy if UK Plc were to release some of the cash they have been holding onto during the recession.
He said: “It is now time for those companies who are in a strong position and who have been able to save cash and pay down debt to step up to the plate.
“The weakness of sterling provides a plethora of profitable investment opportunities. UK Plc needs to take bold steps to finance overseas expansion as well as new export capacity in order to grow the business and provide the economy with a strong export-led revival.”
ITEM believes business investment will fall back by another 6.5% this year, after falling by more than 19% last year. However, the forecast sees this reversing sharply next year, with business investment up by 10% in 2011 and 14% in 2012.
Prof Spencer added: “The next government will be negotiating uncharted waters. It is hard to find a precedent for a situation in which companies are so strong and consumers 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 underutilisation of resources in the economy, but the charts begin to look promising for 2011 and beyond.”
