THANK goodness for the private sector. With the exception of parts of the property investment industry, it is now in reasonably good shape. Contrary to what many believe, this means that Wednesday’s Comprehensive Spending Review – and the all too necessary spending cuts it will detail – won’t derail the UK economy. Sure, a chunk of public sector demand will disappear – but a raft of little-noticed data suggests that extra spending in the rest of the economy will more than compensate.
The I/B/E/S equity analysts’ consensus earnings forecasts for UK companies have surged from growth of 4.2 per cent year on year 12 months ago to 15.9 per cent now. Analysts are the most optimistic since records began more than 20 years ago; this is the first time since the early 1990s that the consensus expects UK profit growth to outpace the global average. I know that equity analysts are an irrationally exuberant bunch and that UK firms are enjoying growing overseas sales. But the analysts’ mood undoubtedly reflects greater confidence among the firms they talk to.
Plenty of other clues suggest that things are going all right (though certainly not superbly) for UK Plc and that it is about to spend a lot more, boosting growth and creating private sector jobs to replace those lost in the state sector. Take corporate bank accounts: many firms are flush with cash. Fewer are saying they are finding it hard to borrow. The British Chambers of Commerce quarterly survey suggests capacity use in firms continues to rise, and is above average in both manufacturing and services. It also finds that competitive pressures are not unusually severe (they tend to be pronounced when there is a lot of excess capacity around, as rivals engage in price wars).
So what is happening? Firms slashed their investment spending when the crisis hit – and because so much capex nowadays is on IT on a three-year cycle, productive capacity has fallen. Recent CBI and Bank of England agents’ surveys give a similar message: plants and offices are running at much closer to full capacity than many people realise.
This is great news for the economy. With profits bouncing back, investment still low, limited capacity, demand that is still growing (albeit at a weaker rate) in part because of sterling, business investment is likely to rebound. Deloitte’s most recent survey of chief financial officers (CFOs) revealed a strong rise in those who say that expanding investment is one of their top three priorities for the year ahead.
Again, one shouldn’t exaggerate this positive trend. But I suspect that Michael Saunders, Citigroup’s excellent chief European economist, is right to be predicting a 10 per cent or so recovery in corporate capital spending by the end of 2011. A similar argument helps to explain why the Ernst & Young Item Club expects GDP growth of 1.4 per cent this year and 2.2 per cent next year (the latter figure still sounds a little high to me, which ought to be proof that I’m no deluded optimist, merely a realist).
The simple truth is that no serious forecaster is predicting a double-dip recession in the UK as their central outcome next year, even though everybody knows that spending cuts are coming. There is plenty of evidence of an economic slowdown since the spring but none of another collapse. Economists often get it totally wrong – but not this time.