One Step forward One Step back?

This week we look at the continuing fallout from the Eurozone crisis for the Wales and UK economies.

It is not surprising that the Bank of England cut its growth forecast last week in light of the euro zone crisis. Whilst there has been recent good news regarding unemployment and UK exports outside the EU, the difficulties inside the euro zone and increasing competition in the flat UK market from EU imports are clearly having an effect on the UK economy.

When this is taken together with less optimistic forecasts regarding UK inflation then this again emphasises that the UK economy is likely to continue its low / no growth trajectory in the short term. In the UK of course the impact of the austerity measures will also continue to be a factor for the next few years.

Any increases in private consumer spending are likely to be largely offset by reduced government spending. There is, therefore, a huge reliance on the private sector to generate the confidence needed for more normal levels of growth, but little in recent news coming out of either the Eurozone or the UK economy to create such confidence.

Longer term the outlook is more hopeful if, and it is clearly a big if, the current eurozone crisis subsides and the major economic issues in the euro zone are dealt with. Only then will the EU starts to become a more attractive market again.

In the meantime it is to ‘non traditional export markets’ that the UK economy will be looking. This particularly the case given the lack of consensus on other measures that can practically stimulate growth.

In Wales, these debates can currently be seen in terms of potential UK government proposals for regional pay, which advocates see as stimulating private sector regional labour markets and critics argue would further reduce demand in the short to medium term in already economically slower growing parts of the UK. Conversely, it is acknowledged that many of the Welsh government’s levers are long term in nature, though there are innovative ideas being discussed to fund infrastructure projects that could assist the Welsh economy in the medium term.

Currently, however, it is a case of one step forward and one step back for the economy both in Wales and the UK.

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Two steps forward, one step back

Last week’s blog highlighted that it will be Wales and the UK’s abilities to access the faster growing export markets in South-East Asia, as well as other non-EU markets for manufacturing and services that will be key in building greater confidence for the future. This week’s blog looks at the latest trade statistics and ask whether progress is being made.

The latest trade statistics show a reduction in the UK’s trade deficit . What is particularly encouraging is the growth in exports to the non-EU markets of Russia, the USA and China (as well as to the largest EU market, Germany). Conversely, exports to the Eurozone were, unsurprisngly, flat, and the deficit with the rest of the EU widened.

It seems, therefore, that with the continuing economic troubles created by the Euro crisis, the UK’s market is being targeted by our EU partners, the eurozone only narrowly avoiding recession. The UK’s drive to widen its export markets is allowing us to offset this, but the benefical impact on UK growth is only marginal.

This is illustrated by the UK having still flat overall industrial output, with manufacturing growth more than counteracted by falls in oil and gas production. In addition, the construction industry continues to be subdued.

Even China is feeling the economic chill wind. It has allowed its banks to lend more in an effort to stimulate the domestic economy,as well as opening negotiations for free trade arrangements with Japan and South Korea

In this scenario, Wales clearly needs to generate a more export focused economy and the recent trade missions by the first minister highlighted in last week’s blog represent a start in this area. It is here that innovation and entrepreneurship can also assist.

In particular, the need to increase the amount of R&D and innovative active and build on existing excellence of institutions such as universities is clear.  The Welsh Government’s Science for Wales strategy and plans for an Innovation Strategy for Wales are therefore to be welcomed.

Much more of this is needed, however, if this is to have the impact on the growth of the economy so badly needed at the current time.

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Déjà vu All Over Again?

As the UK economy slips back into recession, this week’s blog tries to find some good news amongst the gloom.

The UK economy has returned to recession, shrinking by 0.3% in the last quarter of 2011 and 0.2% in the first quarter of 2012. More important than this, the likely continued low or negative growth over the next year or so do not augur well for the prospects of the UK and Wales economies in the short to medium term.

To some extent, of course, this is linked to the continuing Eurozone difficulties which are likely to continue to depress many of the UK’s main export markets. This is not, of course, something that UK or Welsh governments have power to affect.

In addition, the government hitting its borrowing target for the year (£126bn) is good news in terms of giving short term confidence to the markets. This also helps to allow the UK to continue to have low interest rates, which is seen by the government as its main policy to stimulate economic growth.

In addition, it is also forecast that the UK economy will soon return to growth, albeit likely to be weak growth during 2012. 2013, we are told, is likely to be better.

If the government’s growth strategy does not begin to work, however, they are likely to find it increasingly difficult to meet their future borrowing targets without future austerity measures. In addition, the government’s continuing austerity measures will continue to depress demand in the domestic economy both directly and via the “economic mood music” that they create.

This would create a vicious circle where even more demand would be removed from the economy. In addition, because Wales is relatively more reliant on the public sector than the UK generally, then it would likely be harder hit than the UK as a whole.

In addition, whilst the most recent unemployment rates for the UK and Wales showed falls, to an extent that is explained by the rise in people taking part-time work. Even the recent rise in retail sales can be explained by a number of short term effects, from panic-buying of petrol, to an early Easter.

Overall, therefore, the short-to medium term outlook remains uncertain. Growth is therefore likely to be low for the UK and Welsh economies.

The private sector, particularly services, is being relied upon to a large extent. Conversely, construction, affected as it is by the government’s fiscal policy and its impact on infrastructure remains much less buoyant.

Ultimately, however, it will be Wales and the UK’s abilities to access the faster growing export markets in South-East Asia, as well as other non-EU markets for manufacturing and services that will be key in building greater confidence for the future. It is vital therefore that Wales develops and grows exports outside its traditional exports sectors of energy, chemicals and metals, and into innovative and high value added areas such as  automotive and biotechnology.

Recent trade missions from UK and Welsh ministers indicate that this process has at least begun. Much more is needed if this is to have the impact on the growth of the economy so badly needed at the current time, but a start at least does seem to have been made.

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Is anybody listening?

In this first blog after Easter we look at the news of increasing international business relationships being forged between Wales and South East Asia and ask, is this evidence that Wales’s economy is finally becoming truly international.

In the last few weeks we have seen the UK Prime Minister signing a deal in Indonesia that will safeguard airbus jobs in North Wales. The Welsh First Minister has also been in India, promoting increased trade and investment (as well as educational) links.

Panasonic’s decision to undertake R&D in Wales also reemphasises the links between Wales and Japan. These are links that now go back more than 30 years.

For some this exemplifies the globalising of the Welsh economy which began in the 19th century with mass coal and slate exports. For others, Wales’s economic history is still more illustrative of the idea that “globalisation was something done to Wales”.

This is often referred to as the “Resource Curse” and is sometimes put in the context of the Welsh economy being developed as an internal colony. This thesis focuses on the idea that Wales’s economy was not truly industrialised in the 19th century.

Instead, it moved from reliance on one primary industry, agriculture, to other primary sectors such as coal and slate. Even iron and steel can be seen through this prism as being intermediate in basis.

This reliance on a narrow primary base, it can be argued, damaged Wales in three basic ways.

First, these primary resources were often not exploited in Wales itself, instead being intermediate products in the value chain. This meant less backward, forward or horizontal integration’ that would have allowed the development of a diversified economy.

Second the nature of the industries was such that they were better integrated with the outside world than with the domestic economy due to them being heavily exported. The recent good news concerning Wales’s exports shows Wales exports more than 5% of total UK exports and enjoyed an increase of 14% on the previous year. This, however, is based upon the same four industries that Wales has historically relied upon, namely energy, engineering, metals and chemicals.

Third, the rewards from exploitation of Wales’s’ resources, instead of being used in Wales, too often flowed to wealthy owners of the mines and works outside Wales. In this scenario, the current debate over water and whether it could be sold to England (with some in the media seeing water as belonging to all and thus not a commodity like oil or gas) seems to take a familiar track, the rewards from resources Wales produces not likely to significantly benefit the Welsh economy itself.

Given this, the question that remains is whether Wales is learning the lessons from its history or is it doomed to repeating these lessons?

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Previous blogs have discussed the importance of the Eurozone economies to Wales and UK, particularly as markets. This week we examine the progress towards recovery in confidence in the Eurozone.

EU finance ministers have recently met to discuss increasing the size of the Eurozone’s rescue funds. This follows concerns over Spain’s ability to cut its deficit sufficiently, following the signing of the recent “fiscal compact”.

This EU “fiscal compact”,  signed by 25 of the EU’s 27 leaders  (the UK and Czech republic being the only two non signatories) aims to prevent the 17 eurozone countries running up unsustainable deficits in the future. Driven by Germany, which already has such a principle in its constitution,  Germany’s Chancellor, Angela Merkel, has claimed this as representing a step forward towards stability.

It is also hoped, however, that this will bolster the Eurozone’s economic credibility. Whether this move signals the end of the Eurozone crisis itself, or even the beginning of the end, is more debateable.

Whilst the compact can be seen as bolstering the Euro against future crises, it does not deal with the current one. Importantly for UK and Welsh businesses, this is now as much about slow economic growth in the Eurozone as it is about government debt.

It is fiscal austerity which is currently having further knock-on reductions in demand in the economy, the example of Spain being the most recent example. Ultimately, therefore, it is economic growth that will generate the taxation revenue to reduce the debt burden and lower the need for further budget austerity.

Of course, the issues of economic growth and the eurozone crisis are fundamentally linked. Specifically, the lack of business confidence caused by the eurozone crisis is playing a significant role in low eurozone growth.

It is, therefore the indirect confidence boost that the fiscal compact will hopefully bring, that would constitute its biggest impact on ending the eurozone crisis. The concerns that the UK itself may be heading back into recession make this even more important.

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Use it or Lose it?

This week’s blog looks at the impact of one of the announcements in the recent budget, namely the “Patent box” and asks how this might impact on small business.

The Patent Box legislation announced in the Budget means that profits from global sales of products protected by a UK or European patent will be taxed at only 10% from April 2013. This compares to the standard 24% that will exist at that time.

This is potentially good news for innovation-focused firms particularly those in advanced manufacturing and in sectors such as pharmaceuticals, life sciences, electronics and defence, as well as media and creative industries. Unsurprisingly, therefore this has been widely welcomed.

It has also been acknowledged, however, that there will be a likely time lag in its impact. Businesses will, for example, need to identify which patents they actually own and therefore the system may take time before it works efficiently.

There are also, however potentially longer term implications. Whilst one aim of the Patent Box is to provide an additional incentive for companies to retain and commercialise existing patents, it also incentivises development of new innovative patented products.

It may also, therefore, assist in promoting university-business innovation focused relationships. This is because the the Patent Box will apply to new IP and acquired IP provided that the company group has further developed either the IP itself or the product which incorporates it.

Of course, it is important to make sure that SMEs do not lose focus on getting innovation to market by becoming bogged down in the process of patenting. “Planning to lose” advantage from innovation, and thus how to continuously to stay ahead of the competition is also an important skills for SMEs.

It is vital, therefore that Patent box does not distort innovation activities in ways that are detrimental to speedy commercialisation. That said, it is an interesting development and one the Centre for Enterprise will follow with interest.

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Follow the Crowd?

With the budget due on Tuesday, this week we look at the potential effects on business, particularly regarding access to finance, and the alternatives that are starting to spring up.

According to a recent Western Mail article, whilst the economy is still weak, it is now showing some signs of recovery. The main source of concern, of course, remains the Eurozone issue, and the uncertainties this creates in many of the UK’s largest export markets.

Turning to issues at home, and the topic of bank lending to business, the article indicates that banks cannot be expected to lend more, given their current balance sheets. Moreover, it is suggested that whilst the banks were underpricing risk before the crisis they are likely to now be overpricing it.

As a result, it is quantitative easing that is seen as of vital importance. Given that the banks are acknowledged to be very risk averse at the moment, however, it is worth asking how this will actually help SMEs?

Of course, as has been previously discussed, the government lending more directly to business has also been discussed (so called credit easing). The budget may contain up to £20bn in credit easing through a plan to use the government’s credit rating to allow banks to raise funds which could then be lent to SMEs.

Generally, therefore,  alternative approaches to the traditional banking sector approach are being sought.  On this note,  another type of funding has emerged, under a system called crowdfunding.

This has already come to the UK the process (effectively of linking many very small “angel”-type investors together) has been discussed in the media. Clearly there are concerns highlighted, in terms of the difficulties of due diligence, the potential for fraud and the absence of the expert guidance for companies that comes from the larger business angels experienced in this activity.

Conversely, advocates of the idea point to the “wisdom of the crowd” in making good investment decisions. Given the admittance that the banks have not been very good at measuring risk, it is at the very least an idea worth following up on to determine whether it has a place in these financially restricted times for so many SMEs.

Indeed, given the difficulties that so many businesses face with regard to accessing finance, this innovation is likely to be the first of many. Only time will tell if “following the crowd” makes a positive contribution to this vitally important issue.

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Still haven’t found what I’m looking for

This week’s blog revisits the issue of sport in Wales, and in particular professional rugby and asks how this important part of the Welsh economy can overcome its present difficulties.

Last September, just before the Rugby world cup, this blog argued that in order to prevent success on the sports field being short lived, there was a need to build the organisations that support sport. In the case of Welsh rugby, there are over 200 amateur and semi-professional clubs affiliated to the Welsh rugby union, many with facilities also used by the wider community.

It is the professional arm of the game, however, that is the focus this week. The recent Western Mail article highlighted research that apparently showed a growing dissatisfaction with the current structure.

The fact that there is currently a financial review of the regional game in Wales points to imminent change. Despite the results of the research quoted above, however, what has driven the review is not the call to widen the number of regions but instead related concerns over the financial viability of the existing professional game.

Despite the recent success of the national team, regional crowds have dwindled and high profile players are increasingly moving outside Wales, particularly France. This should be of concern, not only to followers of rugby, but to the wider community and economy.

Welsh rugby can be seen as consisting of large (the WRU is one of the top 300 companies in Wales according to the last Western Mail report) medium (each of the regions have multi-million pound revenues) and small Social Enterprises. Their facilities are located all around the country, and can represent excellent opportunities to build on their existing social capital and lever additional benefits for the community and wider economy.

In addition, however, there are a range of other Welsh products and companies that rely, to some extent at least on the game in Wales, creating demand for products linked to the sport specifically associated food and  drink and leisure products generally. Rugby is, therefore at the heart of a cluster, and represents an important economic as well as social and cultural part of Wales.

Clearly in this likely ongoing debate the views of the WRU itself, the regions and their benefactors are vitally important. In addition, however, it would also be beneficial to hear from three other vital stakeholder groups.

First, there are the supporters (both those that currently attend the professional game and those who currently do not for a variety of reasons), who have a variety of views on the way forward. Second, the players themselves are crucial in seeking a way forward, given the variety of ways in which they can and could assist in revenue generation.

In addition, however, the opinion of government concerning this important part of the economy would also be useful to hear. The Welsh government has shown support for sport  for both economic and marketing reasons and is at the very least an interested party in the discussions to be had given the potential effects on the economy that any proposed changes may have.

In September 2011 this blog argued that if Wales wants to truly win, it needed to embrace sporting success when it comes along, but also build on it to strengthen the fabric of the communities from where the success originally emanated. This is even more true today.

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And another thing…

In the aftermath of a raft of articles themed around St. David’s day, this week’s blog takes a look at the main issues raised.

St. David’s Day this year has seen a number of articles analysing the state of the Welsh political and economic environment as well as reigniting the debate over the previous policy focus, namely inward investment and the role of the WDA. A number of important points were raised by these debates:-

  1.  Wales is not immune to the eurozone crisis or its effects, or indeed the wider global economic changes that saw the Welsh economy lose a great deal of inward investment from the late 1990s onward.
  2. The success of the WDA in the past, and the efficacy of reintroducing it in some form, has been called into question. Some see the successes in terms of employment being overstated, too reliant on government grants and low labour costs, and not having sufficiently encouraged the technical, managerial, supplier or skills base needed for self sustaining growth. In addition, it has been argued that many of the goods produced were at the end of their life cycles, required only basic skills for their assembly and used low paid local labour and supply chains predominantly located outside Wales
  3. The economic impact of the downturn have left Wales with higher unemployment than the other UK nations, and the long-standing fall in relative GVA has continued, now standing at around 74% of the UK average.
  4. Whilst the Welsh government has focused on dealing with an increasingly tight fiscal settlement from Westminster, there is increasing concern about the future of the NHS, and the performance of the education system, of obvious importance in providing a skilled and educated workforce for the Welsh economy of tomorrow.
  5. The weaknesses with attracting inward investment in manufacturing are now, it is said, being revisited in both financial services, with claims that success with financial services is based on call centres at the end of their life cycle, limited skills and progression with part-time work, minimum wages and limited multiplier effects on the local economy.

 The above represents a chilling analysis indeed. As ever, of course, there are other viewpoints.

For example, the WDA was always more than just an inward investment agency, doing important work in land reclamation for example. Second the WDA during the 1980s and 1990s,it can be claimed, did what it was actually tasked with doing, namely bringing in employment, a role it was successful in when looking at its record against other parts of the UK.

Indeed, it is this relatively good record that is being used to support calls for the reintroduction of the WDA brand.  The fact that, as has correctly been claimed, the global marketplace for inward investment has, for Wales at least, moved away from being based on low wages or low cost production, does not of itself remove the logic of reintroducing the WDA in some form.

Future inward investment attraction, as has been pointed out elsewhere this week, must be based on the attractiveness of Wales as a location for firms that utilise modern skills and processes to create innovative products and services, as well as head quarters’ operations and Research and Development activities. This, however, requires a balance between inward investors and indigenous firms and this needs a balance in policy that was often not obvious during the time of the WDA.

There is also a clear need for policy with regard to areas such as Higher education, and infrastructure, to also be linked in to this. As such it is encouraging that new ideas with regard to growth zones are being discussed but less encouraging that Westminster and Cardiff are seemingly locked in dispute over issues of importance to economic development in Wales.

The issue of the WDA’s reintroduction is therefore important, but is less important than the policy context in which it would sit in the future.

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Don’t you forget about me: A vibrant SME sector should be a cornerstone of Welsh economic development policy

In the wake of the House of Commons report on inward investment in Wales, this week’s blog looks at the other side of the economic coin, namely small businesses in Wales, in the wake of the latest Federation of Small Businesses (FSB) report.

The FSB’s ’ “Voice of Small Business” Member Survey was widely discussed this week, as were  the results for Wales.  Whilst overall the results indicate the generally tough economic conditions, there are some particularly important differences when looking at Wales compared with the UK as a whole.

To begin with, the FSB report for the UK as a whole found that, unsurprisingly in the wake of the Project Merlin results, only 70% of their members claim to have used finance to support their main business over the past 12 months, 19% less than 2009. In terms of the amount borrowed, this has also fallen, from an average of £53,600 in 2011 compared to £49,900 in 2009.

In addition, whilst profitability has increased for a third of members over the past financial year it has fallen for 54%, and sales volume has risen for just over 40% but fallen for 47%. Whilst this indicates the tough economic conditions these figures are comparable with 2009 and more positively, a larger proportion of members in 2011 logged an increase in both key measures. 

Even more positively, the mean turnover for the survey’s UK respondents had risen from £535,000 in 2011 from £524,000 in 2009 and average workforce of FSB members was slightly up, to 7.38 comparable with 7.35 in 2009. The comparable figures for Wales, however, are not as healthy. 

The average number employed by Welsh members has fallen from 8.7 workers in 2009 to 7.6 in 2011. Average turnover of Welsh FSB members also fell to £454,000, down £4,000 on the figure from the last survey in 2009. 

If these were the only differences, then perhaps statistical reasons could explain the results. Unfortunately, Wales can be seen to be lagging behind the UK as a whole on a wide range of important statistics. 

For example, the FSB found that 43% of members in Wales had targeted growth in the past 12 month, compared to 50% for the UK as a whole. In addition, of the Welsh firms who said they had targeted growth 56% had seen increased sales, compared with 58% for the UK as a whole. 

Also, while 52% of Welsh firms are targeting growth in the coming 12 months, this is still behind the UK average of 58% and even though 69% of Welsh FSB members also said they planned to increase their client base this compares to 74% for UK wide members. 

The 68% of FSB members in the UK have introduced new or improved products/services, a 15% increase on 2009, is also slightly higher than the 66% for the Welsh businesses questioned, who only saw a 13% increase on 2009. In addition 26% of FSB members overall planned to increase staff training in the next 12 months, the comparable figure for Wales being 24%. 

In terms of innovation, again, while 17% of UK respondents planned to increase Research and Development over the next year, in Wales this was less (13%). Finally, at the UK level 15% of firms planned to increase trade activity (importing and exporting), the figure for Wales being only 10%. 

For many of the variables the differences between Wales and UK are not large. In isolation, therefore, these differences may not cause concern. 

Taken together, however, along with ONS figures (Dec 2011) that show 8000 firm births and 11000 firm deaths and UK survival rates on the decline, and a consistent picture emerges. Growth is not a prevalent phenomenon in the SME sector and therefore in the wider context more has to be done to support the sector which accounts for around 99% of all businesses in Wales. 

It is worth noting, of course, that over half of the Fortune 500 were created during recession/ downturn. Policies that encourage firms to be more innovative are also likely to create employment and introduce new products and services, as well as producing firms that are less likely to feel the impact of economic downturns. 

In contrast, those firms that are less innnovative are more likely to adopt rationalisation and cost reduction. If nothing else, the FSB data demonstrates further evidence that the focus on inward investment, which has been seen in recent weeks, is equally needed for Wales’s indigenous SMES.

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