As official trade figures disappoint yet again, the CBI is unveiling a new package of export-boosting measures to help British firms unlock overseas opportunities. They include an incentivising tax break, a review of the practicalities of the Bribery Act and making export finance schemes easier to access.
Although the UK is making progress in the fast-growing economies of Asia and Latin America – specifically the BRICs (Brazil, Russia, India and China) – it still lags behind some of its international rivals. Only this week, official trade figures showed that the UK’s deficit on trade in goods and services was £3.6 billion in February, the largest in six months.
In a new report, The Only Way is Exports: renewing the UK’s role as a trading nation, the CBI says growing mid-sized companies with the potential to enter new markets must be at the forefront of any export-led recovery.
But it warns too many businesses are impeded by the perceived risks and costs of exploring new overseas markets, with only one fifth of the UK’s SMEs exporting, compared with a quarter across the European Union.
John Cridland, CBI director-general, said: “Global trade has been one of the bedrocks of UK economic strength but to cement our position as a leading exporting nation in the future we need more active Government support.
“While we are making progress in some fast-growing markets, weaker than expected economic growth in our major trading partners has held us back. We also have a heavy dependence on imports: ships are arriving in UK ports bringing in more goods than they take back.
“The growing middle classes of Asia and Latin America want to purchase leading UK branded goods and services, so there is every reason for the UK to be confident as long as businesses continue to make headway.
On export performance being embedded in all government sector strategies, Cridland said:
“To lift exports, business and government must build on those sectors where we excel, such as automotives and public services, as part of a wider industrial strategy.”
The response by businesses to this year’s Budget has been muted, with some SMEs praising increased capital expenditure, a reduction in corporation tax and changes to the PAYE system, while others have said the Chancellor did not go far enough to help the UK’s small businesses.
The rate of corporation tax is to be cut by a further one per cent – it’s currently 28 per cent, but is due to fall to 24 per cent next month and then to 21 per cent in 2014. In 2015, it will fall to 20 per cent. The fuel duty increase scheduled to come in this September has been scrapped.
An extra £3 billion a year is to be spent on infrastructure projects, while £12 billion has been earmarked to help home buyers get a mortgage on a new build property, throwing a potential lifeline to housebuilders.
Meanwhile, George Osborne said he is cutting employers’ National Insurance from April next year, potentially saving SMEs up to £2,000, with some SMEs paying no NI at all.
However it wasn’t all good news. The rate of growth in the economy was vastly overestimated and is now predicted to be just 0.6 per cent – Osborne hinted that the first quarter of 2013 would also be in negative growth.
John Cridland, CBI Director-General, said: “The CBI was clear this Budget needed to deliver a good dose of business and consumer confidence, while being necessarily fiscally neutral.
“We’re particularly pleased our call for a focus on the short-term boost of housing has been heeded, alongside an increase in longer-term big ticket infrastructure spending.
“This was recognition it was a mistake to cut capital spending so sharply and that other growth-boosting measures were taking too long. But by shifting £6bn to housing and infrastructure, the Government has sowed the seeds for growth and jobs.
“An extra one penny cut in corporation tax will also make the UK one of the most internationally competitive locations in which to do business.”
Sean McCann, personal finance specialist at NFU Mutual, said: “We all expected some relatively slim pickings from the Chancellor but overall, this Budget is a pretty good deal for entrepreneurs.
Katja Hall, CBI chief policy director, said: “Ministers must pursue growth aggressively. The UK needs a robust, coherent industrial strategy that promotes trade and taps into business potential across the country, not just in the South East.
“The memories of failed 1970s industrial policies mean politicians have shied away from this area for decades – but this is a strong package and can give businesses the long-term confidence to invest, expand and export.
“Local Enterprise Partnerships (LEPs) have lacked the power and punch to boost growth so reform is vital. The principle of pooling funding into a single pot is sensible and competitive bidding will force areas to plan innovatively and target support where it can leverage private sector investment.
“The devil will be in the detail. We can’t forget that growth is the overarching objective here, with localism the means to an end.
“It is essential that major programmes, which need national or sector-based planning are not undermined. Removing the ring-fencing of Technology Strategy Board budgets, for example, would risk fragmenting successful and nationally significant innovation schemes.
“Businesses are best-placed to identify their training needs, so they must be in control of the skills budget. There is a role for LEPs in mapping local skills shortages but employers must be in the driving seat when it comes to funding.”
However, both domestic orders and output are expected to increase in the coming three months.
The CBI’s latest quarterly SME Trends Survey, which had 347 respondents, showed that total new orders fell slightly (-5 per cent), for the second quarter running. This was driven by falls in both domestic orders (-6 per cent) and export orders (-9 per cent), although both declined at a slower pace than the previous quarter (domestic orders by -11 per cent, and exports orders by -21 per cent).
However, SMEs expect total new orders to grow over the next three months (+9 per cent), likely to be driven by anticipated growth in domestic orders (+10 per cent), in contrast, export demand is expected to be broadly flat (-2 per cent).
In line with falling demand this quarter, output continued to fall (-8 per cent), failing to meet expectations of modest growth (+5 per cent). However, once again, production is expected to increase next quarter (+7 per cent).
With less activity over the last three months, numbers employed in the sector fell slightly (-4 per cent), for the first time in three years. But SMEs anticipate an increase in headcount in the next quarter (+11 per cent).
Anna Leach, CBI head of economic analysis, said:
“Activity has continued to contract this quarter, with falling production disappointing growth expectations.
“Nonetheless, better news on the domestic front is expected, with output and domestic orders set to rise modestly. But there is little sign of improvement in export prospects, and uncertainty over demand continues to weigh on investment plans.”
SMEs remain concerned about export prospects for the year ahead with optimism falling significantly (-22 per cent), at the fastest pace since April 2009 (-32 per cent).
However, sentiment overall deteriorated at a slower pace: a balance of -6 per cent said they were less optimistic regarding the business situation in the three months to January, with the rate of decline easing compared with the previous two quarters (July -13 per cent, October -12 per cent).
Furthermore, firms’ plant and machinery investment intentions for the year ahead turned positive (+4 per cent) for the first time since April 2012 (+13 per cent). However, more firms believed that uncertainty over demand would limit capital spending, cited by 64 per cent, the highest since April 2009 (70 per cent).
Elsewhere, average unit costs continued to rise only modestly (+10 per cent), at a significantly slower rate compared with that in the two years to mid-2012. But although average prices were flat domestically (-1) and continued to fall in export markets (-5), output price inflation is set to pick up significantly in the coming three months (domestic +14, export +8).
Over one in four (28 per cent) UK businesses – equivalent to 480,000 firms – are considering cutting costs to cater for the rising costs of raw materials, according to research commissioned by NIG, the commercial insurer.
Larger firms are being hit harder, with nearly half (46 per cent) of those with an annual turnover of over £20 million actively looking to offset rising raw material costs by making reductions in other areas of the business.
Significantly, six per cent of businesses in the UK, equivalent to 109,000 firms, admit that the rising prices of raw materials means that they might not be adequately insured against theft given the extra, unaccounted costs to replace stock. The same number (6 per cent) also admit that they might not be adequately insured against damage such as fire or flooding.
The research reveals that 16 per cent of all SMEs in the UK are also considering altering business processes or products as a way of dealing with the upward trend of raw material prices. This proportion rises for businesses that have an annual turnover of more than £20 million to 24 per cent – equivalent to around 4,000 firms.
Jon Greenwood, managing director at NIG, said: “UK businesses continue to face a very challenging economic environment and a key aspect of this for many firms has been the rising cost of the materials they use to build their products. The consequence is that adjustments are being made in other parts of their businesses to counter these cost pressures.”
UK manufacturers are particularly affected, according to the research. While one in four (25 per cent) retailers are considering reducing their costs to cater for rising raw material costs, over two-fifths (43 per cent) of manufactures are doing the same.
The research reveals large disparities across the country. While only six per cent of businesses in East Anglia say they are considering cutting costs to cope with the rising price of raw materials, this rises to 20 per cent in the Midlands, 28 per cent in the South and 37 per cent in the North. The North West is the most affected region, however, with 52 per cent of firms looking to find savings to address the issue of rising costs.
Jonathan Greenwood added: “UK businesses have worked extremely hard during the past five years with many focusing on primary challenges such as maintaining growth and keeping customers happy. However, raw material increases have begun to impact many firms and there is a clear need for UK businesses to consider how this might have effected their insurance requirements and cover.
“Firms concerned about the issue of raw materials costs should consult their insurance broker as there are ways of mitigating the issue of rising costs. Many can provide information and advice about how businesses can be better protected, especially how to protect premises and stock; they can also arrange for a risk assessment to be carried out by the insurance company, which can help identify potential issues. This is especially the case if increasing raw material prices mean firms have inadequate cover for damage or theft.”