Q1 2016: high performance vs low expectations

The global economic climate has worsened, forecasts are being downgraded for both UK and world economies and Britain’s EU membership hangs in the balance. With genuine cause for concern, is now the time to invest?

Yesterday saw the launch of London Chamber of Commerce and Industry’s Capital 500 quarterly economic survey results for Q1 2016, in partnership with ComRes, which surveyed a total of 506 London business leaders in February. The headlines, as summarised by ComRes’ Director of Political Polling Tom Mludzinski, are:

  • Despite all business performance indicators being on an upward trajectory, expectations for the year ahead were in significant decline – just 2% of businesses expect UK growth to improve.
  • There has been an improvement in domestic demand, with 11% of businesses reporting increased domestic sales.
  • There has been a significant jump in export sales, with 10% of businesses reporting increased export sales.
  • There is positive news in the employment market, with growing employment figures in London. 9% of businesses have increased employment levels.
  • 15% of businesses have increased investment in training, however those recruiting are having trouble finding candidates with the skills they are looking for.

Analysing these results at the event, held at Metro Bank, were: Christian May, Editor of City AM; Paul Mellor, Design Director at Mellor&Smith; Capital 500 regular Vicky Pryce; and Colin Stanbridge, Chief Executive of LCCI.

At tipping point?

Looking ahead, Pryce painted a worrying picture of an unclear fiscal position resulting in revisions of the growth forecast. She outlined the reality as she sees it: productivity will not bounce back, there is a lack of investment in the economy and no clear source of demand. Manufacturing is flat, and the impact of the steel crisis is yet to be seen; meanwhile the service sector continues to grow, albeit slowly. In a speech earlier in the week, International Monetary Fund (IMF) Managing Director Christine Lagarde said she is ‘on alert’, warning that downside risks are increasing with no appropriate measures being rolled out.

Christian May echoed this sentiment, stressing that “the banking sector, which is of central importance, is facing difficult times, particularly investment banking, with job losses anticipated”. However, City AM reported that London has clung onto its title as financial centre of the world in the Global Financial Centres Index thanks to the rise of fintech organisations propelling the sector forwards (read the full article here).

May said a complicated budget has left businesses having to navigate over 80 changes to the corporate tax code. And Pryce was clear that, “for the Chancellor to achieve his forecast budget surplus by 2019/20 in this worsening environment, he will need more tax cuts or a further tax hike… when what the economy needs is an extra push to encourage investment and innovation”. She felt that this surplus goal is a self-inflicted problem that is adding unnecessary pressure and resulting in the decline in confidence we have seen.

Almost three in five businesses (58%) seeking to recruit encountered difficulties finding suitably qualified candidates. Both May and Pryce advocated government intervention in the need to fill the skills gap by helping smaller firms to secure visas – currently an incredibly bureaucratic and arduous process via the Tier 2 route. LCCI also recommends that the government work with the new Mayor of London to establish a third-party sponsorship route (“London Visa”) for established sector-specific organisations.

It’s clear that interest rates will remain low for the foreseeable future – more bad news for banks but good news for borrowing. The impact is that spending continues to come to the economic rescue, but how long will this last? Pryce maintained that the state of the economy is a problem that we “cannot export our way out of” and summarised that this is “a slowdown that should worry us”.

Growth during uncertainty

There are some businesses that may look at this bleak picture and instinctively baton down the hatches, intending to wait out the storm for sunnier times ahead. And then there are those more opportunistic businesses which capitalise on the general sense of fear and use it as their chance to grow. These, Paul Mellor said, are the businesses his design agency looks to work with – the disruptors – who turn up their advertising and marketing when others turn it off. Amongst these, he listed: Uber, Nike and Mishcon de Reya (we didn’t pay him, we promise).

So while the overall outlook is somewhat foggy, it’s no secret that out of hardship, creativity and innovation are often born. Mishcon de Reya encourages bold, entrepreneurial decisions through its The Leap 100 campaign, supporting a select group of some of the UK’s most exciting, high-growth companies. They are each in the process of making the leap to the next level, refusing to let caution prevail.