UK companies are being over-cautious with their cash piles, declares the report. They are sitting on some £754bn, which is around 50% of total UK GDP. ‘Until these companies stop stashing the cash and start increasing levels of investment and dividends, the economy will remain on the critical list,’ says Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club. And not everyone is being so thrifty. Spending in the US has ‘picked up nicely’ over the past year, compared to business investment in the UK, up a paltry 1.2% in 2011.
Without a hefty cash injection from British firms, the economy is only going to grow ‘a dismal 0.4%’ this year, says ITEM. And hefty means hefty: even if businesses grow investment by as much as 6% next year and 10% in 2014, it won’t be enough. The company sector financial surplus is still expected to increase from 5.2% of GDP in 2011 to 5.6% in 2014.
On the export front, however, some glad tidings. Contrary to the doom-laden figures published by the ONS last week, ITEM reckons that UK exports of goods volumes increased by 5.1% in 2011, with services up by 3.9%. And this year is likely to yield a similarly positive performance: export volumes are forecast to be up by 4.5% and net exports will add 0.3% to GDP (not much, but better than a poke in the eye). It's worth noting too that ITEM, which stands for 'Independent Treasury Economic Model', wrestles with the same model used by the Treasury. But it is wholly independent.
Over in little-people-land, it’s a very different story. Households are still under the cosh and feeling the heat from public sector cuts. Unemployment is expected to approach 9.3% of the UK’s total workforce by the middle of next year, with just fewer than three million people out of work. ‘But there is a small glimmer of light at the end of the dole queue,’ says ITEM’s Spencer. ‘For the first time in years, the gap between wage growth and inflation should start to close, before reversing in 2013.’ Finally, some good news for consumers.
But there’s less for businesses to celebrate. We may have avoided the double dip, but with the eurozone’s financial troubles still wreaking havoc with the global markets and rising unemployment, the UK desperately needs a corporate spending spree to kickstart its stalling economy. Will companies risk their precious savings at a time like this? There will be a lot of fingers crossed in Whitehall…