Green to Amber

Over the last year we have witnessed the most dramatic transformation in business confidence that I can ever remember in my working life. With all the financial signals showing at green, we are now seeing Britain expanding with an annualised growth rate of 3.2%; this is the fastest rate we have had since before the financial crisis began in 2008.

Certain sectors of the economy are growing so fast that it is getting difficult to recruit the correct

level of staff. In May I was having a meal at a roof top restaurant overlooking Tower Bridge and to the south of the river I counted 52 working cranes. Some of you would say that it is typical of an accountant to count the number of working cranes whilst having a good meal out, but I could not believe the level of construction work that was going on all around me - it was absolutely staggering. It is therefore not surprising to see so many of our KSK contractor and subcontractor clients heading to London each weekday morning between 5 and 6 am and earning levels of money not seen for quite a while.

As a firm we are seeing the biggest increase in new business start ups that we have experienced for a very long time. According to a report by the Office for National Statistics, there are 4.6m people working for themselves representing 15% of the total workforce compared with 13% in 2008. The report goes on to say that the construction and carpentry industries are the most prominent sectors making up this increasing number of self-employed. At 15%, the proportion of self employed in the UK is almost in line with the EU average of 15.2%. One other statistic which many of those who are self employed will acknowledge is that 13% of them work 60 hours a week or more!

So why, with all the ever improving UK economic data around us, am I starting to believe that we

might be nearing the peak of this boom period? Firstly the strength of the pound when it briefly traded at $1.715 has really hurt many UK companies with the WPP, the world’s largest advertising agency, being the first to report the effect on its trading results. In its report it said that it had been “ravaged” by the strength of the pound stating that, whilst earnings had increased, this had been wiped out by the currency losses when converting international business into sterling. I believe that we shall soon hear this same story being repeated many times over from those multi nationals that trade internationally. It is a very similar story for those that trade in Europe. It is bad enough for them

that the euro zone is moving closer to adopting further radical measures to ward off a second recession, but the strength of the pound against the euro has seen some of our clients witnessing significant decreases in their exports. It is therefore hardly surprising that with the UK being so dependent on Europe, our exports growth in the manufacturing sector has slowed with current output and new orders are being reduced quite significantly. I don’t think it is generally recognised what a depressed state the euro zone economies are in. Even Germany, the power house of Europe, is currently reporting negative trading figures. With this situation our own economy is bound to suffer. Last week the civil engineering group, Low & Bonar, which has 25% of its income arising in Europe, reported that growth from the first half of the year had been completely wiped out by falling revenues in the latter six months of the year. As with WPP I think that, for companies that rely on Europe for their trade, the Low & Bonar story will be repeated many times over in the next 3-4 months.

This then leads on to my second point that domestic sales, rather than exports, are now the main

driver of our growth. They account for two thirds of our GDP. But as the newspapers keep telling us, the growth in real disposable income is still very low and will probably remain so for a while. It must mean that consumption is being driven by people borrowing more or saving less as we all get caught up in the wave of optimism. Whilst I believe the strength of the pound and the euro has probably pushed the threat of an increase in interest rates into 2015, there is no doubt that they are going to rise. The area at real risk of interest rates rising is not primarily mortgage payments but house prices themselves. When interest rates rise, house prices may well fall which in turn will mean that consumers will then spend less and start saving again.

My third worry surrounds the Ukraine crisis and the extreme violence which is arising in Northern Iraq. I cannot help but think that world events originating from both or either of these countries could have an enormous effect on markets throughout the world. Already we are seeing UK companies having contracts with Russian companies being cancelled almost overnight as the “tit for tat” retaliations of trade sanctions really begin to effect international trade.

Finally, with the General Election due in May 2015,

we shall soon be entering a period of political uncertainty which is not good for business confidence. Then there is the situation in Scotland with the referendum vote taking place on 18th September. Again, I don't think it is generally recognised that if, sadly, there is a “Yes” vote then any move away from the UK could not actually take place until March 2016. There would then be 18 months of wrangling largely as to whether Scotland would be able to retain sterling as its currency. If the truth be known, I don't think that anyone can really quantify the real financial effect of a “Yes” vote but that in itself leads to massive uncertainty which again is bad for the UK economy.

So for now there is real strength in the UK economy and we all have to contribute to that remaining so. In writing this article I am just seeking to make the point that there are some warning signs on the horizon, and some of those are at amber.

- Charles Little