Latest downgrade pours more cold water on UK recovery hopes

Fewer mid-sized firms are going bust - but with one leading forecaster slashing its UK growth forecast again today, can this trend continue?

by James Taylor
Last Updated: 19 Aug 2013
The UK economy is at a 'critical juncture', according to the pointy-heads at the Ernst & Young ITEM Club, as it downgraded its growth forecast for this year from 1.8% to 1.4% (and from 2.3% to 2.2% for next year). Its theory is that global problems, including the eurozone crisis and America's debt wrangles, will weigh heavily on the UK's growth for the foreseeable future. That's bad news for UK firms - and has encouraged one small business group to step up its campaign for targeted VAT cuts. The latest survey data suggests fewer mid-sized firms are failing than this time last year, but things are unlikely to improve in the next 12 months if the economy keeps going sideways...

The good news is that the ITEM Club expects business investment to keep growing - by 8% this year and 12% next year. But that's still below the long-run average; the forecaster believes worries about what's happening in Greece (and its possible knock-on effects for the rest of the Eurozone) will discourage business leaders from putting their hands in their pockets. Since this was supposed to be our best hope of powering our way out of the downturm, that counts as pretty bad news - and accounts for today's downgrades.

The latest insolvency data from Experian was actually relatively encouraging: fewer UK firms with 50-500 employees are failing now than at this time last year, while the failure rate for companies with 100-500 employees actually halved year-on-year last month. So medium-sized companies, like their larger brethren, seem to be finding life slightly easier. At least for now.

However, the overall UK failure rate remained static (at 0.09%), which rather suggests that small businesses are still having a really tough time. In fact, the Federation of Small Business - whose latest research revealed a big drop in confidence during the last three months - argues that we need VAT cuts to stimulate particular parts of the economy. Construction and tourism are two of the sectors it highlights; with consumer spending still in the doldrums (and the ITEM Club reckons real incomes will shrink by 1.4% this year), it reckons cutting VAT to 5% would help stimulate some extra spending in these areas.

It's an interesting idea. But politically it sounds like a long shot, since the Government needs that tax revenue to help it balance the books (at least until it can hack back the state a bit). The ITEM Club did say today that despite the downgrades, it was still 'optimistic about the future growth outlook' for the UK, since 'corporate balance sheets are healthy’ and ‘exports should pick up again quite quickly once current uncertainties in Europe are resolved'. The Government will be crossing its fingers that it’s right…

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