KPMG Economics

At last, it looks as if the UK is finally out of recession, albeit only just. The latest figures show that the economy grew slightly more strongly in the fourth quarter of 2009 than previously thought; with GDP rising by 0.3 per cent quarter on quarter in October-December. However, the figures also reveal that overall the economy is five per cent smaller than it was a year ago and much of the return to growth has been attributed to generous government stimulus efforts which have helped to buoy household spending, which rose by 0.4 per cent at the end of 2009; measures which are already being withdrawn. So the move out of recession looks like being a slow one with the Economist Intelligence Unit forecasting UK economic growth of an anaemic 0.7 per cent in 2010 and 0.9 per cent in 2011.

There remains a real concern that the next set of figures for the first quarter of this year could also be touch-and-go as VAT returns to 17.5 per cent and consumers look to the coming election and fiscal squeeze. With the uncertainty continuing there is a risk that the UK could be facing a double dip recession before the recovery has even begun. Against this pretty pessimistic backdrop, it is surprising to discover that British companies are the most bullish in Europe about their prospects for future growth, with 83 per cent of Chief Executives claiming that the outlook for their business in 2010 is either good or very good, according to new research from KPMG International.

The survey, which was conducted among 3,200 mid-market businesses in eight countries, found that approximately three quarters (74 per cent) of European businesses believe their prospects for 2010 to be positive. At 83 per cent, UK firms were overwhelmingly the most optimistic, while in contrast, German (65 per cent) and Danish firms (66 per cent) were the most measured in their assessment of the outlook for the next 12 months. The research also indicates that the majority of UK firms appear to have weathered the economic crisis well, with three-quarters saying that their company was as strong ­ if not stronger -- at the end of 2009 as it was at the end of 2008. Only 25 per cent indicated that their business was weaker as a result of the recession. This compares to a European average of 69 per cent who felt their company has survived the recession intact.

At first sight, the fact that almost threequarters of respondents in the UK say that business over the last 12 months has been either good or very good appears to be somewhat staggering, given the prevailing economic circumstances. This could be purely down to bravado; however, one is more inclined to think that it is a reflection of the sheer relief felt by companies which have successfully navigated their way through the downturn. In times such as these, survival equals success; small wonder then that at the start of 2010 so many feel they have good reason to be cheerful.

This is in turn reflected in their cautiously optimistic outlook for the coming months ­ many are now looking towards growth plans, including more than half who plan to develop new products and services, and over a third who are looking to tap into foreign markets. So exactly how can companies achieve growth in a mostly flat economic environment? It stands to reason that for every business feeling robust and looking for growth, there are others who will not be faring so well and could be ripe for merger or acquisition (M&A) opportunities.

Nina Amin


"british businesses
should also keep sight of the fact that over the next decade we will see a mass middle class of one billion-plus people in india and china"

Nina Amin

 

KPMG believes that the M&A market in the UK is set to make a return in 2010. Our research shows that forward price to earnings ratios are now seven per cent higher compared with last year's adjusted figure, suggesting a gentle increase in corporate appetite for deals. This time around however, the M&A recovery will be led by corporates and through IPOs, with the equity and bond markets open to quality credits and growth stories.

As the developed markets of the UK and Europe currently offer limited growth potential for aspirational and robust UK businesses, the sun looks to be rising in the East. More than two-thirds (68 per cent) of middle market companies that we surveyed indicated that international business was a critical part of their strategy, both in terms of attempting to minimise the effects of the economic downturn and building a strong platform for future growth.

With so many businesses experiencing the loss of key customers and suppliers over the last 12 months, it comes as no surprise to see a large majority turning their attention to international markets for new sources of revenue. Whether it is a ramping up of their import and export business, or expansion into new territories, cross-border activity is increasingly being viewed as an integral part of company strategy.

Taking advantage of such opportunities for growth will ultimately be an important catalyst in sustaining business confidence levels across the British and European economy as a whole. Many companies will be looking East simply because of the way in which countries like India and China managed to weather the economic collapse which hit the West in spectacular style. The Asian economy did not escape the global crisis as exports to the US and Europe declined dramatically, but unlike the banking systems in the West, Asian banks remain relatively healthy.

The latest economic indicators look good as well with India recently confirming in its annual budget that its economy has grown by 7.2 per cent in the current full year (2009-10) and has a growth target of 8.5 per cent for 2010-11. These sort of numbers look incredibly appetising against the UK growth predictions of less than one per cent over the next year. In 2003, a report by Goldman Sachs predicted that by 2032 India would be among the three largest economies in the world. With a young, aspiring population of over a billion, a proactive government, stable political environment and increasingly liberalised policies, India continues to be an attractive proposition for investors and UK businesses. Almost 200 companies from the Fortune Global 500 have already established their presence in India cutting across a range of sectors, and this number is rising.

The opportunities available in India for UK companies are no longer restricted to outsourcing or setting up call centres, but around a wide range of sectors including financial services, education, construction, telecom and real estate. Joint ventures are proving an increasingly popular way for western companies looking to tap into Asian buying power. Accessing new markets is essential to many businesses and joint ventures are at a considerable advantage from day one. Interestingly, joint ventures were last popular in the early 90s when companies wanted to access low cost manufacturing bases in countries such as India, but companies are now pursuing joint ventures to tap into the buying power of these markets. For companies in sectors such as energy and chemicals, joint ventures are a relatively low cost way to tap into the global resources essential to their growth.

 British businesses should also keep sight of the fact that over the next decade we will see a mass middle class of one billion-plus people in India and China. With an increase in disposable incomes and an increasingly visible trend of consumerism, India's abundance of educated and talented manpower, which is amongst the youngest in the world, has placed it in an enviable position. These are the people who will be buying their first consumer products, their first holidays and their first service products. The market for basic goods such as groceries and textiles is already large, driven by the demands of an enormous population, offering huge opportunities for business people here in the UK.

As the UK finally emerges from recession there are many lessons that have been learned over the last two years. Certainly attitudes to debt have changed and businesses have been forced to get back to basics. In the long run this could be a blessing as leaner, more debt adverse businesses now look forward to new growth opportunities and new markets.

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