In February 2010, BDO LLP announced a series of reports outlining how the post-recession landscape is changing for businesses in the UK. Here, the business services firm offers a snapshot into of the first of these.
UK implications
For those determined to stick their heads in the sand, the rapid change to the new economic world order presents a significant threat to the UK’s competitive position. But, says BDO LLP, we believe the change provides unprecedented opportunities in an expanded market place for those keen to identify and adjust for the implications of the new world order.
For the UK it’s a question of balance – and not just because our government, a coalition forged regardless of ideology, will be treading a tightrope over a hung House of Commons. As a priority the UK has to restore a better sense of balance to public and private finances. But balance will be key to the longer term as well, with the UK having great opportunities for leveraging its influence, sitting at the fulcrum between the United States and Europe, and between the Western and Eastern economies, India in particular.
In part, future UK growth depends on a shift of the balance from consumer spending and towards international trading. As LloydsTSB report in their first UK Quarterly Bulletin for 2010, notwithstanding the boost injected by the 25% fall in sterling’s tradeweighted exchange rate since early 2007 (which might have been expected to make UK products and services more attractive), evidence of such a rebalancing so far has been limited.
Over the past three years, the four-quarter current account deficit as a share of GDP has fallen, but only from 3.4% to 2.2% in Q2; a good start, but much more needs to be done. Further, as LloydsTSB show, the improvement would not appear to have been driven by a rise in exports but by a marked fall in imports – reflecting the decline in domestic spending that is inevitable in a recession. An import-induced narrowing in the current account deficit is not a sustainable means for rebalancing growth. As domestic demand recovers, imports are likely to rise again, and with them the trade deficit. The UK’s deficit on trade in goods and services widened to £3.8bn in January 2010, compared with a deficit of £2.6bn in December 2009. After narrowing a little in February, the gap widened further to £3.7 billion in March – worse than March 2009, as well.
A helping hand for manufacturing As Gerard Lyons, chief economist of Standard Chartered Bank, has argued, the countries that succeed in the new order will fit into one of three categories:
• They will have the financial and human resources
• They will have natural resources
• They will have the ability to innovate and change
Paying renewed attention to the UK’s manufacturing sector has to be at the heart of a strategy for restoring balance. Many observers have argued that the UK has recently depended too much on the financial sector. We should not forget that the UK is a larger manufacturer than France, and some of its companies – notably in pharmaceuticals and defence – are world class. BDO’s own manufacturing specialists published a report identifying six recommendations for policy makers for helping the manufacturing sector:
1 Dealing with the deficit, and thus providing stability to foreign exchange and interest rates.
2 Establishing an environment that allows manufacturing to be competitive, starting with a much promised taking down of unnecessary red tape.
3 Setting a clear strategy with defined and measurable targets.
4 Providing specific support to mid-market manufacturers; government initiatives tend to be aimed at the very big and the very small, with insufficient attention paid to the engine room of the economy in the £30-300m turnover bracket.
5 Creating and supporting investment in emerging technologies.
6 A recommendation not to forget the traditional manufacturer, and the innovation that happens (and will need to happen) within the UK’s traditional industrial base.
Shifting markets
The UK needs to ask questions not just about ‘what?’ but also about ‘where to?’– recognising the shift from traditional markets in Europe and the G8 towards new economies. A recent study by Leeds University Business School, sponsored by UK Trade and Investment (UKTI), Global Market Attractiveness Post ‘Credit Crunch’, ranks the UK’s 52 major trading partners using an index based on International Monetary Fund data on past and projected Gross Domestic Product and Purchasing Power Parity growth levels and the share of these countries in British exports.
Collectively, the 52 countries account for 95% of global British exports and around 90% of global GDP. Between 2005 and 2007, the countries offering the best opportunities were mostly Britain’s long-established trading partners: United States (1); Germany (2); France (3); Ireland (4); the Netherlands (5); Belgium (6); Spain (7); Italy (8); China (9) and Japan (10). Looking forward the report forecasts some startling changes. Between 2012 and 2014, the top ten is predicted to be: China; USA; India; Libya; Ukraine; Russia; Romania; Korea; Mexico; and Singapore.
Many of the UK’s biggest trading partners in the West slip dramatically: Germany (30); France (34); Ireland (42); the Netherlands (37); Belgium (44); Spain (47) and Italy (46). “The results of this study were really surprising,” argues Professor Peter Buckley, the report’s lead author, “and show just how quickly the world is changing following the downturn in the wake of the global financial crisis.” “We didn’t expect to see some of our closest neighbours and trading partners, like France, Germany and Spain, being replaced as key business locations by former Eastern Bloc nations such as the Ukraine and Romania in just five years time.
It’s perhaps not surprising that China and India will become increasingly important for British trade, but I think the prospect of Egypt and Pakistan potentially becoming a bigger draw for UK PLC than Canada and Saudi Arabia is an eye-opener.”
Where do we go from here?
The government has a key role when it comes to ensuring the UK economy adjusts to the demands of the new order. Taking advantage of fiscal and policy levers the government can help the UK economy nurture the capabilities and advantages at its disposal and make the changes necessary.
But good business leaders have never waited for or relied on politicians and regulators to initiate change.
Furthermore, such business leaders will recognise that it is easier to effect change when times are hard than when times are easy.
For those companies who understand their core capabilities, work hard to nurture them and are able to adapt to and fully understand the rapidly evolving international market place and can identify the opportunities, growth will be available on an unprecedented scale. As Michael Porter observed in 1990: “A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade.
Companies gain advantage gain advantage against the world’s best competitors because of pressure and challenge.”
