Leasing Professionals

John Mulheron: “The industry is staring down the barrel of a very important year”

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For most of us, Tuesday signalled a return to normality.

So, it’s back to work armed with an array of typical resolutions – lose weight, exercise more, lay off the booze and getting our finances back on track after the usual festive splurge.

Productivity is the mental buzzword and one of the main challenges the UK needs to address as we get ourselves match fit for life after European membership.

For the UK and European leaders, there’s no getting away from that fact we’re staring down the barrel of very important year. The political earthquakes that shook 2016 may not have yet derailed the economy, but we’ll likely to find it difficult not to escape a series of aftershocks.

Start on a strong footing

So far, pretty much every set of industry data has shown that Brexit didn’t actually happen. Economically and fiscally the country is on track, with more positive PMI (purchasing managers index) data this week showing manufacturing output rose again. This puts us on a strong footing for the start of the year. Consumers, until now have kept spending. However, this will likely be the first of a series of rebalances and retailer Next has already signalled a warning shot across the bow lowering its forecasts.

This week also sees the start of our major high street retailers announcing their Christmas trading results. Next, John Lewis and the major supermarkets will be the first to tell us what consumers have spent and more importantly what they have used to finance that spending.

Consumer credit is growing at its fastest pace in 10 years – up 7% YOY – and in November shoppers splashed an extra £633 million on plastic, this is another concern on the horizon.

January and February are typical ‘belt tightening months’ footfall is lower and spending down and will likely be similar across other areas of the service sector. Leisure, eating out and entertainment traditionally feel the pinch in the New Year as we reverse the excesses of Christmas. These industries also employ huge numbers of people.

Perhaps the biggest headache for the service sector is banking. London will always remain one of the world’s financial capitals as it is too interconnected for everyone to simply pack up and move to Frankfurt or Dublin. But, we’re starting to hear mutterings that some will soon announce their position.

This might signal the start of a poker match.

The city has seen the likes of Nissan, GSK, Facebook, Softbank, Jaguar Land Rover all commit to the UK post Brexit. This list of global businesses signing up has been comforting and along with a reported £16.3 billion of direct foreign investment, which should be seen as a further sign the UK is more than capable of standing on its own two feet.

However, the government is well aware how much the financial services do to boost treasury coffers – 9.6% of UK output, a £47 billion trade surplus and £69 billion in taxes. Those figures don’t consider the support services that feed off our financiers. I expect the City to start flexing its muscles very soon.

Even a small exodus by certain strategic business units would set nerves jangling. SME’s tend to see the major corporates as a barometer and we need to keep the positive news coming otherwise they will revert to a defensive footing, reducing investment and squirreling cash.

What we need is clarity of vision and clarity in communication. Worryingly to date, our Prime Minister has shown little sign of either and it’s time to speak up.

The Chancellor’s cautious, but up-beat autumn statement committed around £27 billion extra to infrastructure spending, combined with signing off on Hinckley, additional commitment behind HS2 and Heathrow’s third runway is finally the strategic shift we needed from just printing more money.

Nothing to offer the sick patients

The solution post-2009 crash was to pump trillions through the banking system to avert a great depression, the same policy treatment for our post-Brexit condition. Only again today, Deutsche Bank is urging the EU to cough up another €150 million to bail out Europe’s indebted banks. This cannot continue.

The trouble is central banks have nothing different to offer their sick patients and storm clouds are starting to hover over our neighbours economically and politically with France, Germany and Netherlands going to the polls this year. Italy has already started to signal a new intent, wanting to leave the euro and close its borders. It may only take on other major player to start a revolution and it may tip Brussels into a full-on crisis. German exports levels are falling and southern Europe remains vulnerable with poor growth and high unemployment.

Closer to home, UK consumers have become far too cosy with the ‘drug’ that is cheap money. We have become used to borrowing at rock-bottom interest rates, extending over-draughts or locking in a new, low cost mortgage. With all drugs, there comes a tolerance and we will start to see that tested as inflation becomes a reality!

Until now the cost of a weekly shop or a tank of petrol have been the same. OPEC’s (Organization of Petroleum Exporting Countries) last minute deal beginning of December to cut production has started to filter through to the forecourt. Retail buying cycles are soon to be repriced in against a stronger dollar or euro and whether these are fully passed on to consumers remains to be seen.

Margins can only be squeezed so much as the ‘bean counters’ use up ways of cutting costs. Inflation at around 2% is inevitable, but if it sits around that figure, should not be too much of a worry. The issue as mentioned above is increasing our productivity, which will in turn drive growth and wages in real terms. Here, we need solutions more quickly.

The trouble is, projects such as HS2, improving local transport networks or rolling out fibre optic broadband to the shires, whilst all very commendable, don’t just happen overnight.

So, what should we be doing in the short term?

What business leaders are crying out for is actually pretty simple – it boils down to some basic principles of business that even the smallest of micro-entity start up needs. Firstly a plan, which needs to be communicated.

In a recent Institute of Directors (IoD) survey, 60% of respondents said they felt optimistic about the year ahead and profits would rise. Good news. But, in the same IOD survey, 45% felt that ‘uncertainty’ would hold back on investment, whether machinery, floor space or staff.

I appreciate David Davis and Liam Fox don’t want the Prime Minister to give away all our battle plans, but people need know we actually have one. Regardless if you voted to remain or leave, we have a right to know in which direction the ship and its captain are heading.

Is it two years flat from the Article 50 starting gun? Is there cliff edge? Will I still be able to recruit from EU counties? What do I need to start thinking about as a business owner or director to set my own ship on the right course? These are all valid questions.

Come on Theresa, give us a clue. I’ve become tired of charades over Christmas.

Businesses also need tools and support. It’s all very well shouting about the need to export globally but for the majority of UK businesses this is a leap into the unknown.

Enterprise Nation, a national business network found that 76% of SME’s don’t export at all and 80% still have no plans to either.

That is a massive opportunity and an area that needs addressing immediately. The CEBR (Centre for Economics and Business Research) has calculated SME’s are missing out on £141 billion a year by not selling goods or services overseas. A fancy government website with a few exporting tips and ‘how to’ guides, won’t cut the mustard. SME owners wear numerous hats on a daily basis and don’t have the luxury of throwing manpower or money at the problem. Let’s find actual ways how can we help them.

The riddle of productivity

Lastly, how can we address UK productivity which has delivered a miserable 2% rise over the last 8 years?

For the previous eight years, in the ‘good old days’ before the 2008 crash, it rolled along happily at around 19%.

To put that into context, Germany’s GDP per hour is 36% higher than ours. France is 31% higher and even Italy is 11% more productive. Looking closer at productivity by region, it’s a more worrying picture.

Put simply, regions outside of the South East are not as productive as they should be and if the rest of the UK matched London’s output, we would be near the top of the world table.

The northern powerhouse – defined as the North East, North West and Yorkshire and the Humber represents a fifth of UK economic output. If it were an independent country, it would be the 10th largest in Europe. Pretty good? It’s still puts it 20% lower than London, which has a considerably smaller workforce. To fix this we need a strategy that both understands and works for each region.

If you want a couple of radical solutions:

● first, use the massive Westminster renovations to an advantage and relocate vast numbers of government departments to the regions where they can be at the coal face and see what needs to be done;

● second, I would make changes to our tax system to ensure we are highly attractive to overseas investment – corporation tax dropping to 17% by April will help but we need more;

● I would introduce further tax breaks for start-ups and, more controversially I would scrap stamp duty. It is a blunt tool that could be replaced by a capital gains tax.

Lastly, we need to prepare and equip school leavers better for the outside world, the lack of financial or business education is a national disgrace. We have a well-documented skills shortage and without a fully enlightened next generation this will continue and our productivity will remain flat.

John Mulheron is managing director of CMF Capital www.cmfcapital.co.uk