The UK can be more confident about its economic recovery

Mark Gregory
MUCH is made of economic confidence. We search for signs of changes in consumer mood, monitor retail bellwethers and pour over surveys which may signal cautious optimism about the UK recovery. But it is capital confidence that provides a direct and immediate view on a country’s prospects.

Global investors are an unsentimental lot: they deploy resources where potential returns are highest. And their conclusion is that there is no better place to place your money in Europe than the UK, according to our European Investment Monitor.

Inward investment projects grew by 2.7 per cent in the UK in 2012, generating at least 30,311 jobs. This is a highly positive and undistorted signal. But the message for Europe was very different. Investment fell slightly, and slumped by 25 and 13 per cent into Italy and France respectively. Capital is also leaving the Eurozone: French projects into the UK were up 87 per cent in 2012 and outward investment from Spain grew by 34 per cent.

In contrast, global business leaders invested in UK projects in 2012 in everything from business services, software, to manufacturing. This was driven by factors we often overlook: political stability, culture, telecommunications, language, workforce, and labour costs. The view is that the UK – followed by Germany -- is stronger and more flexible than its European counterparts: satisfaction with UK labour costs and flexibility increased from 48 per cent to 63 per cent.

Government should take some credit. Investor satisfaction with our tax regime jumped from 53 to 61 per cent, helping the UK secure a leading 29 of the 168 headquarter relocations in Europe, compared to 12 in 2011. Changes to the tax regime to support innovation also bore fruit: the UK leads in attracting R&D facilities, securing a 23 per cent market share.

But while the UK leads in Europe, it must now win a greater slice of the global market. Consider manufacturing. There is talk of a significant share moving out of Asia over the next decade, as local costs rise. But the UK secured just 12 per cent of manufacturing investments in Europe in 2012, despite the creation of 15,000 jobs by Jaguar Land Rover. Over the past 10 years, the UK doesn’t even rank in the top six recipients in Europe for manufacturing job-creation.

We must develop a clear strategy, defining where we want to compete and what we must do to develop sustainable competitive advantage. This has to be a joined-up plan, covering key areas like real estate, taxes and incentives, regulation, innovation, training and infrastructure. And it must include the regions. London is the jewel in the crown for attracting foreign capital (45 per cent in 2012), but lack of support for investment in the regions is damaging the UK. This must change to compare better with France and Germany, which offer a stronger national proposition.

The perspective of investors is important, and their growing cash piles even more so. Their message is that we are top of the class in Europe, but in the second tier globally. While we should recognise our strengths, we must now use this confidence to assert ourselves in the top division.

Mark Gregory is chief economist at Ernst & Young.