By Marcus Leach
There are no quick fixes for the UK economy but a concerted effort to tackle the serious imbalances which created our legacy of debt and faltering growth will secure a better, brighter future for all of us, said Confederation of British Industry (CBI) Director-General, John Cridland in his new year message.
In a new report featuring a ‘Vision for rebalancing the economy’, the CBI sets out how by acting now, the UK can move away from its dependence on debt driven household and government spending and increase business investment and net trade.
“2012 is going to be a hard road but if we are canny and act now to put in place solid economic foundations, we will be stronger and secure a better future for ourselves and our families," John Cridland, the CBI Director-General said.
“We need to identify how the UK will earn its living and pay its way in the years ahead and that means adjusting to change.
“The faltering recovery with family and business budgets under pressure and the on-going crisis in the Eurozone are stark reminders of the need to rebalance our economy away from household and government debt.
“There are no easy answers when it comes to securing future long-term growth. The hard graft of rebalancing is the only way it can be achieved, so it’s time to stop talking about it and get on with it.
“If we fail, the UK’s debts will continue to grow and our trend growth-rate will remain low. Only through rebalancing can we return growth to long-term sustainable levels.”
The CBI’s ‘vision for rebalancing’ makes clear that the unprecedented economic stability between 1993 and 2007 masked growing imbalances. The UK economy has become dominated by debt driven household and government consumption, which together accounted for 89% of GDP in 2009 — more than in France, Germany or the US.
To achieve sustainable growth in the medium to long-term, the economy has to become more driven by investment and exports, while allowing the burdens of both government and consumer debt to subside. Failing to rebalance alongside debt reduction would leave the economy struggling to grow.
After evaluating four possible rebalancing scenarios based on varying levels of contribution to growth from trade, investment and consumer spending, the CBI sets out the most likely ‘base case’, based on a typical private sector recovery. This model sees contributions of net trade (0.8%) and investment (0.5%) exceed household consumption (0.4%) to produce growth, albeit below trend, of 1.6%. The task is to generate stronger business investment, better-targeted exports and stabilise government and household debt.
The CBI’s ‘aspirational rebalancing’ scenario, which is less likely but illustrates an optimistic model, is based on best-case historic recoveries in which rebalancing is achieved without reducing the overall growth rate of the economy.
Although the CBI’s analysis concludes that the ‘base case’ rebalancing model is the most likely, continuing weakness in the Eurozone does still present a significant threat to UK economic rebalancing as around 50% of our exports go to Europe. The risks include a worst-case scenario of a market default, or austerity measures having a negative impact on demand for foreign goods and services.
The task of delivering rebalanced growth will be achieved most effectively by ‘swimming with the tide’ to take advantage of the long-term domestic and global changes, particularly the rise of middle-class consumers in emerging markets, spurring a greater demand for our services. The demand within the UK for significant investment to update our ailing infrastructure, digital growth and the diversification towards renewable energy will provide significant business investment opportunities.
The CBI’s ‘vision for rebalancing’ base case sets a course for the UK to rebalance its economy within five years and create sufficient growth, albeit below trend, to improve living standards. By acting now this rebalancing can be delivered by increasing business investment and by looking beyond our traditional horizons to boost export performance.
“To make up for the loss of public sector spending, the private sector needs to deliver £170 billion of new investment over the next five years, so it’s time to power-up and get on with rebalancing," Mr Cridland added.
“The Government’s National Infrastructure Plan recognises the urgent need to make substantial investments to upgrade this country’s infrastructure, which will mainly come from the private sector, so there is a huge opportunity here for businesses.
“Companies can take advantage of the growing demand for services from the expanding middle class in emerging economies, particularly in healthcare, education, finance, transport and digital.
“Recent problems in the Eurozone have made our trade performance temporarily even worse, but for the medium-term we must now target new high-growth economies such as at the BRICs and others including Indonesia, Mexico and Turkey.
“By looking beyond our traditional horizons to focus on these high-growth countries we could give our exports a £20 billion boost by 2020.
“Rebalancing has to be the right answer for a stronger UK in the years ahead. Getting the pain over as quickly as possible through determined deficit reduction also makes sense.
“2012 may well be tough, but it will mark the beginning of a more prosperous future.”
To help the transition to a rebalanced economy, the ‘Vision for rebalancing’ report highlights five trends that could support the development of new growth sectors:
1. The Government estimates that £200 billion of investment is needed in the next five years to upgrade the UK’s infrastructure and it has already announced a number of projects in its National Infrastructure Plan. £140 billion of the total funding must come from the private sector which would deliver all of the £115 billion additional investment required in the base rebalancing scenario.
2. Rapid growth in emerging markets will result in wealthier populations and provide better channels of access to goods and services. The CBI and Ernst & Young have set out an exports strategy which by targeting these high-growth economies could give the economy a £20 billion boost by 2020.
3. The UK has the largest e-commerce market and second largest online advertising market in the world and so is well-placed to capitalise on exploding digital and mobile activity around the world.
4. Businesses can tap into demographic changes including growth in urban populations combined with rising incomes in emerging economies which will mean increased demand for services, particularly in healthcare, education, finance and transport
5. As the UK’s energy trade deficit rises as North Sea oil and gas production decline, there will be a need to find alternative new sources of energy. Diversification towards renewable energy will both stimulate business investment and decrease energy import levels.
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