Growth in the Balance  29 May 2012

The return to recession in the UK and much of Europe, combined with the ongoing Eurozone debt crisis, has led to a political realignment across Europe, and a change in priorities, emphasizing economic growth rather than austerity. However, the desire to promote growth has been countered by the need to maintain existing commitments to austerity programmes.

Chancellor Angela Merkel insists on austerity measures.

President Francois Hollande wishes to promote growth.

This has led to the view emerging that growth and austerity are not mutually exclusive, but must be balanced. Growth in order to be sustainable must not be funded by borrowing, and austerity is a necessary part of the recovery programme.

This balance between growth and austerity has emerged on a number of levels.

Europe: Growth versus Austerity

Francois Hollande was elected as President of France promising to advance the cause of economic growth, and that austerity was no longer inevitable. Shortly after his inauguration, he met with Chancellor Angela Merkel of Germany. Mrs Merkel remained firm in maintaining the need for austerity as set out in the European Fiscal Pact, but was willing to consider measures to promote economic growth provided the existing commitments to austerity were not compromised.

Greece In or Out

The unpopularity of Greece’s bailout deal led to the politicians who agreed it being swept from office in the latest elections. The parties who gained seats in the elections wished to renegotiate the deal and were unwilling to maintain the commitments to austerity which have already been made. However, negotiations to form a coalition have failed, and new elections are being called. German and European politicians have made it clear that maintaining the commitments to austerity in the bailout deal will be a major factor in whether Greece is able to remain in the Eurozone and keep the single currency, or whether it will have to leave and re-establish its own currency.

The situation here also is in the balance. Politicians are expressing their preference for Greece to remain in the Eurozone, but contingency plans are being made nevertheless in the event that Greece should have to leave the Eurozone.

The recent G8 summit leaders expressed a strong preference that Greece should remain in the Eurozone. The participants also stressed a balanced approach to growth while still maintaining austerity measures.

UK Progress Toward Growth

William Hague advised businesses to work harder and seek export orders.

The UK’s return to recession has led to widespread calls for more action to promote growth. The Queen’s speech, setting out the government’s legislative programme, was criticized by business leaders for lacking measures to promote growth. Foreign Secretary William Hague replied on behalf of the government by saying that the only growth strategy was for businesses to work harder. Business leaders responded by saying they were already doing all they could, and the problem was lack of growth in the economy and the unwillingness of banks to lend.

Britain is seen as being at the turning point between recession and growth, and is hoped that the economy will return to growth as the year progresses, but the timescale of this is unclear. Economic growth in Britain is in the balance.

The IMF recently reported on Britain’s prospects for growth. The current austerity plans were supported, but the possible need for a ‘plan B’ future stimulus of the economy if growth does not return later in the year was highlighted. Chancellor of the Exchequer George Osborne highlighted that the credibility earned for the government’s balance sheet would enable them to support lending to businesses, new housing and more infrastructure.

Hopefully growth in business activity will return to the UK economy this year, just as a certain species of ‘busy’ bumblebee has returned to Britain after a long absence. However, this was not without a ‘plan bee’ of human intervention.

Looking for Growth

In this economic climate, where growth is uncertain, austerity measures continue, and measures to promote growth are restrained by commitments to austerity, where are the hopes and possibilities for growth to be found?

One of the key areas where growth is expected is emerging markets. UK Foreign Secretary William Hague’s advice to work harder was accompanied by advice, not just to get on one’s bike, as Norman Tebbitt famously said during Margaret Thatcher’s government, but to get on an aeroplane and seek out business abroad. Winning export orders in these emerging markets will be one of the key areas for economic growth in Britain.

Another area where growth is expected is Britain’s resilient service sector. There is some confidence that this sector will generate growth in the economy in the coming year.

Medium sized firms are seen as a key engine for generating economic growth in Britain. The government has identified 10,000 of these, and it is seeking to professionalize in order to enhance the ability of these companies to grow and create new jobs.

Certain areas of the technology sector remain a key area for economic growth. Sales of smartphones, tablet computers and the apps that run on them have continued to grow. Another growth area is in E-readers and the ebooks that run on them.

Aside from these areas which are expected to produce growth, the possibilities for growth will often be down to individual companies identifying opportunities for growth and adopting new methods and strategies. This is the activity of entrepreneurship, which is often associated with small firms and start-ups, but which will equally be needed by medium sized as well as large firms. The aim of professionalising medium sized firms is to help give them the ability to take on new challenges and move up in the growth league.

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Posted in bizzy blog on 29 May 2012.