Positively pessimistic: exploring zimmerframe economics

Exoloring whether the budget will add foundations to growing confidence among UK businesses, or whether positively pessimistic is simply the new normal.

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By Jack Peat

In the face of a harsh economic backdrop and subdued consumer confidence, one thing is clear; businesses, particularly small businesses, want to grow. Unfortunately, this silver lining will count for little or nothing unless the foundations in which organic growth can be achieved are put in place. Come March 20th, businesses across the country will be waiting with the baited breath of a FTSE tradesman as George Osborne and his red suitcase appear for the cameras in front of Downing Street, revealing what this coalition government is prepared to do for business.

The Federation of Small Businesses’ (FSB) latest ‘Voice of Small Business’ report has revealed that business confidence in the UK has moved from a negative reading of -5.6 in the final quarter of 2012 to a positive reading of 6.3 in the first quarter of 2013. Indeed, confidence seems to be in abundance at the start of the year, with both the FTSE 100 and Dow Jones stock exchange hitting their highest levels in history, providing a good indicator that the macroeconomic environment remains stable.

Responding to a lost age: the new normal

On a micro level, the Chartered Institute of Marketing’s Confidence Monitor, supported by Deloitte, paints a more detailed analysis of business sentiment in the UK. In keeping with the FSB study it shows that business confidence has improved over the last three months, with SMEs investing in growth and larger corporates reverting to loss aversion tactics. However, the study showed that rather than growing in a conventional sense, businesses are adapting to the low-growth environment and being positively pessimistic.

This is what I would call Zimmerframe Economics. Growth over the near future will be much more reserved that it once was. Rather than throwing caution to the wind, business strategies are more likely to be geared towards taking  two steps forward, resting and recalculating, before making further steps in the future. There are several economic indicators responsible for this.

lending has decreased significantly since the economic downturn, with some small building societies lending more to businesses than the high street corporates. Indeed, debt as a primary asset class has been reduced substantially over the past year, and organisations are now faced with the challenge of doing more to attract the capital necessary for expansion ambitions.

consumer confidence has fallen off the track of late, and the average household is now enduring high inflation and stagnating disposable income. Recent findings by GfK NOP give some room for optimism in this space, but it is far too early to judge whether confidence will pick up enough so that businesses feel confident about expanding.

Eurozone unemployment is at a record high, according to Eurostat, which recently revealed 16.3 million people are out of work in the 17 countries that joined the euro. The so-called ‘story of a lost generation’ is becoming the scandal of a continent, with 51.4 per cent of those aged 16-24 jobless in Spain, and the UK having to endure its own youth unemployment catastrophe.

Red box of delights

Positive sentiment in the business sector amidst one of the worst economic growth periods ever seen reaffirms my faith in business but topples my expectation of the government. If the appetite for growth is there, why are we not doing enough to support this?

Francesca Lagerberg, head of tax at Grant Thornton, told the Daily Telegraph there are two main considerations of this budget: “how far can you go without stalling growth? And how can you stimulate the economy when there is little money to spend?”

The Confederation of British Industry has called for action on construction, plugging the current housing gap by spending around £1.25 billion on building 50,000 affordable homes. They have also called for £950 million to be spent on business tax measures like a two per cent cap on business rate increases.

The organisation’s director general, John Longworth, said time is running out for the government to take action. “Our own research shows that firms across Britain believe they can drive growth this year, but they can’t do it alone,” he said. “Bold action must be taken now to boost confidence so that businesses can create wealth and prosperity. That means both delivering existing promises and taking radical action today, not tomorrow.”

If the government is to make a case that they can enable businesses to grow before the next election, now is the time to do it. Ed Miliband’s Labour has recently garnered 41 per cent in a Guardian/ ICM poll compared to David Cameron’s Conservatives 29 per cent, marking the biggest gap in almost a decade. Businesses want to grow, but in an age of zimmerframe economics, the government isn’t doing enough to enable them.

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