04/08/2011

In search of that elusive growth — what’s the outlook?

By Philip Lawlor, Investment Strategist, and Guy Rigby, Head of Entrepreneurs, Smith & Williamson

For entrepreneurs and growing businesses the health of the economy will often determine the current focus of the business, as well as its appetite for risk and growth. With the UK economy struggling to gain traction, many businesses are still under pressure.

UK economic growth was 0.2% from April to June of this year, which means hardly any growth over the past nine months. In fact, the economy is still 4% below its previous peak of March 2008. This is unusual given that in the deep recessions of 1979 and 1990, it took less than three years for gross domestic product to rise above earlier peak levels. So why is growth so lacklustre?

The UK is facing severe headwinds. Consumer spending makes up two thirds of the UK economy, but consumers are experiencing a sharp decline in disposable income. With unemployment at 7.7%, any wage increases are modest and being squeezed by burgeoning living costs. The government’s measures have yet to reduce unemployment, although they have impacted on confidence.

The credit culture that spanned the 1980s to 2008 resulted in household debt as a percentage of disposable income growing from 85% in 1985 to 180% in 2007. Consumers are no longer spending more than they earn — instead they’re focused on reducing their debt. This is expected to continue for a while. So the decline in consumer lending is perhaps as much about a lack of enthusiasm for credit as an unwillingness by banks to lend.

Inflation has been a major problem over the last 18 months, but there is nothing to suggest it will continue to rise in the longer term. The focus for the Bank of England’s Monetary Policy Committee has subsequently shifted to the shortfall in consumer demand. With inflation expected to fall in 2012, another round of quantitative easing (boosting the country’s money supply) is likely in an effort to stimulate consumer activity.

To discuss your business growth plans in the current economic climate, call Guy Rigby on 020 7131 8213 or email: guy.rigby@smith.williamson.co.uk

Risk warning

Investment does involve risk. The value of investments and the income from them can go down as well as up. The investor may not receive back in total the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.

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Watch the video below featuring Guy Rigby of Smith & Williamson discussing the reasons why a business needs vision, a strategy and tactics to succeed.

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Disclaimer
By necessity, this article can only provide a short overview and it is essential to seek professional advice before applying its contents. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Smith & Williamson Investment Management Limited
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Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.