Companies may face challenges as growth forecast cut

Companies may face challenges as growth forecast...Through the course of this year, the economy has been growing swiftly, with companies increasing investment, consumers buying more and unemployment plummeting.

Indeed, the last of these represents a particularly significant form of business investment; even though productivity has been low, companies are investing in people and skills as they look to capitalise on what looks like a brighter future after years of gloom.

However, it could be that the present is rather better than the future. The UK is set to see growth of over three per cent in 2014, but all economic forecasts have predicted a lower expansion of gross domestic product next year – albeit due to the impact of the gradual rise in the base rate that most would consider a natural measure in response to an established recovery.

The latest Ernst & Young Item Club forecasts have said this rate of growth will drop from 3.1 per cent in 2014 to only 2.4 per cent next year.

In doing so, the Item Club have delivered a comparatively gloomy forecast compared with other bodies. For example, the latest International Monetary Fund forecast was for growth of 3.2 per cent this year and 2.7 per cent in 2015.

This could raise some serious new challenges for those involved in corporate governance in UK companies. For the last 18 months it has seemed that the storm clouds have been clearing and the problems of recent years have been dissipating as the rays of sunlight break through. Now, however, instead of clear blue sky, there are more clouds on the horizon.

How dark these turn out to be is unclear – and it is this uncertainty that characterises the situation now, the Item Club’s chief economic advisor Peter Spencer has said.

Mr Spencer remarked: “In the first half of 2014 the UK economy hit the ‘sweet spot’, with the beneficial effects of rising investment and confidence feeding through. But while growth is set to continue, the outlook is now clouded by a growing groundswell of risks.”

The “political and economic uncertainties” are increasing, he stated. One of them is that of the future path of UK government economic policies, with the general election just months away. In addition to this, there are European problems to consider, from the renewed struggles of the eurozone to the Ukraine situation.

“Recently, the UK economy has surprised on the upside. It might again. But currently, the balance of risks is downwards,” he concluded.

Of course, it would be unwise to be too pessimistic. Mr Spencer said the base rate is unlikely to rise until the spring of 2015, but that is not too much later than in previous forecasts, not least in the context of it having been pegged at 0.5 per cent since back in March 2009. Moreover, a growth rate of 2.4 per cent over a 12-month period is hardly something to be glum about; George Osborne would have been turning cartwheels had Britain experienced that in any of the years between 2010 and 2013.

However, it does mean that companies planning for the future need to do so carefully, with an eye on a future that might not be quite as bright as hoped for just a few months ago.

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