Uncertainty
The start of the New Year is traditionally a time for looking back at the year just ended
and looking forward to the one ahead. Many businesses will be doing just that. 2014
was a significant year for the UK’s recovery from the recession of the past few years
and 2015 will be important as well. Demand has been rising and the economy has
been performing well recently. Figures out in October showing that the economy
expanded by 0.7pc between July and September with Gross Domestic Product (the
total value of output) now surpassing its pre-recession peak.
But there are two words that crop up again and
again in any discussion of the current state of
the economy- ‘sustainable’ and ‘uncertain’. The
two are linked.
Businesses like steady, sustained growth because
it means a continuous rise in consumer spending
and they can then plan ahead with confidence
on issues such as sales, cash flow, and profit. If
they think it is likely that there will be a steady
growth in demand, they will increase output and
in doing so, will take on more employees. They
are also likely to invest more- in new buildings,
technology, and training courses, all of which
help to create demand and profit for other
businesses who in turn are able to grow - thus
creating a virtuous circle. On the other hand,
stuttering growth and uncertainty about the
future in terms of consumer spending tends to
put these ‘on hold’.
So, if the economy is doing well, why are there
concerns that economic growth might not be
sustainable?
Output and employment are rising but real
wages (the purchasing power of the wage) are
not. You might ask, ‘If employment has risen,
doesn’t this mean that more people are earning
money and so spending should rise?’ That is
true, but a large part of the fall in unemployment
is people becoming self-employed where (initially
at least) earnings can be low. Furthermore, for
several years, millions of employees have seen
only a very small increase in wages and some
have seen none at all. This is understandable
from the perspective of an individual firm; if ‘times
are tough’, then large wage increases are not
going to occur as the business needs to survive
as best it can. However, when hundreds of
thousands of businesses all do it together, wages
and spending cannot rise very fast and that is
reflected in the demand for goods and services.
Employees in the public sector have seen a very
limited growth of wages as well. Consumer
confidence is not very high and the so called
‘feel good factor’ is not yet firmly established.
Another reason for the uncertainty about the
sustainability of the recovery is the issue that
those who ran up large debts on credit cards
and loans ‘during the good times’ are now using
what wage increases they have managed to
achieve to reduce the amount of borrowing that
they have. Once again, very sensible from their
point of view, but not necessarily beneficial for
businesses in the high street and elsewhere
who want a high demand for their products.
Now you might ask, ‘If debts are being repaid to
the bank, doesn’t that mean more money for the
bank to lend out again?’ Sadly the answer may
well be both ‘Yes’ and ‘No’. Banks do have more
money if loans are repaid but many small and
medium sized businesses are still complaining of
‘a credit crunch’ - a reluctance by banks to lend
to them because of uncertainty about getting
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Uncertainty
continued
the money repaid. This will hold back investment
which is another contributor to demand in the
economy. Even those firms who can access
funds may be wary of investing because without
any certainty over the future of consumer demand,
they may well think it unwise to buy new buildings,
equipment and technology.
When these factors are considered alongside
expectations that the Bank of England will start
to raise interest rates in order to prevent inflation
sooner rather than later (which will increase the
cost of consumer and business borrowing and
so slow growth down), you can see why there is
uncertainty over the likelihood of a sustained rise
in consumer spending – and what the effects of
that might well be.
But what of selling abroad? Obviously not all
businesses export, but revenue from sales
abroad is an important component of total
spending on UK goods. Is there some hope
here? Well certain sectors are doing well but the
exchange rate has risen in recent months and
this makes the price of UK exports more
expensive which means we might well sell less.
In addition, the UK is not immune from the
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problems in the Eurozone – many countries
there are still in something of a depressed state.
Demand for UK goods from those countries is
not expected to rise very fast. Couple that with
the issue of the rising exchange rate and you
can see why there is concern that there is
uncertainty about export earnings powering the
economy forward in a sustained manner.
Could the government take steps to increase
demand itself? Not really; the coalition’s economic
policy has centred on cutting government
expenditure and even if the Labour Party win
the next election, they are committed to reducing
the budget deficit as well.
Now this is the season of goodwill and hope for
a better future. It is certainly not ‘all doom and
gloom’ in the business world; the economy has
expanded quickly over the last 18 or so months
and unemployment has fallen faster than
expected but there is still uncertainty about the
recovery and that is not something that those
running a business like. Certainty helps bring
spending- and spending helps bring certainty.
But is there enough of either?
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