Strong services, export growth and recovery in consumer confidence projected to drive growth

Cebr predict that after a difficult 2014, the Irish economy will recover to growth at around 3% in 2015. In Cebr’s latest quarterly forecasts for the Irish economy ‘Irish Economic Prospects June 2014’, the forecasters predict Irish GDP growth of 1.3% for 2014 but a recovery to 3.4% in 2015. Growth is forecast to average 3.2% per annum from 2015-2019.

Other features of the new forecasts released today are:

– Consumer spending growing by 1.2% in 2014 and growth accelerating further to an average of 2.3% from 2015-19;

– Investment to grow at 10.0% in 2014 and to average further growth at an annual rate of 7.6% from 2015-19;

– Exports to be hard hit by falling pharmaceutical sales and chemical exports but to recover to growth of 3.0% in 2014 and an average growth of 5.1% from 2015-19 based strongly on buoyant service sector exports;

Oliver Hogan, director at Cebr, said: “while pharmaceutical exports have been hit by a decline in sales, services exports are expected to more than make up the difference. We expect robust GDP growth of 3.4% in 2015 driven by the recovery in construction and inward investment.”

Because exports are a relatively lowly taxed sector, the export shortfall has done little damage to the government’s fiscal plans and provided that the predicted growth revival takes place, the government deficit should be eliminated by 2017 and surpluses of 0.8% and 1.9% are predicted for 2018 and 2019.

Douglas McWilliams, executive chairman of Cebr, said: “Cebr was the first external forecaster to predict that the Irish recovery plan would work. We now see sufficiently strong growth in the Irish economy to eliminate the Budget deficit altogether by 2017 if politicians can resist the temptation to start spending money again.”

A cashless society is a long way off, according to allpay

Despite the growth and increased availability of contactless payment cards, cash still reigns as king of tender. This is according to Ross Macmillan, market intelligence consultant from payment collection specialist allpay, who believes that we are still looking at a significant number of years until cash is replaced as the dominant method of payment.

This week’s report from the British Retail Consortium, which looks at retail sales in Britain in 2013, revealed that the growth in contactless, cards, express stores, self-service tills, and online sales, has contributed to an increased use of debit cards accounting for 50% of retail sales. Over the last five years, new payment technologies have grown in use by 11%, while cash saw a 14% decline.

Ross said: “The report suggests that the decline in cash use could symbolise the beginning of the end, but I really think we are some way off this becoming a reality.

“Speculation on the future of cash as a method of payment has been rife for a number of years in the payment industry. I don’t believe suggestions that we are entering a period that will ultimately see cash replaced as the number one method of payment because it will take a significant number of years for the global population to change their mindset on something so engrained into everyday modern culture. One day we will look upon cash with the disdain we do for bartering with livestock or grain, but this is – in all likelihood – decades off.”

Ross continued: “With 53% of transactions still being carried out by cash, it goes without saying that it still remains a dominant force in our everyday lives – real money allows you to budget and gain control over your finances, and this won’t change overnight; in fact, we have been in this situation before. In 2011, the decision to cease the production and acceptance of cheques as payment was scrapped due to widespread public and political criticism. Any attempts to do the same with cash would only be met with potentially even great animosity and reluctance.

“There are a large number of people in UK who still do not have bank account with many more being underbanked and preferring to budget and pay their bills in cash. We know from the markets we operate in that cash is an effective budgeting tool – particularly for lower socio economic groups – as they can ensure their spending is closely controlled.

“Arguably, we are moving into a period in which cash will sit comfortably alongside new payment channels, such as mobile applications. It will remain king for retailers, as well as across other sectors such public sector corporates like councils and government departments who are still providing cash facilities to their customers that allow them to pay their bills. However, alongside this we will see the emergence of new forms of payment and its imperative we are able to embrace this.

Ross concluded: “The growth in card, mobile and contactless payments does represent an exciting milestone for the development of the UK’s digital economy, but it’s critical to understand that this will not be at the expense of cash. Cash still represents a tangible, convenient and controlled payment method for paying for goods and services.”

Centric is acquired

Shawbrook Bank has published outstanding results for the year ending December 2013. The Bank’s rapid growth resulted in a pre-tax profit of £16.8m – a significant increase from an accounting loss before tax of £7.1m in 2012.

Shawbrook is also delighted to announce a strategic acquisition for the Bank – the asset-based lender Centric Commercial Finance from Cabot Square Capital LLP. Centric’s range of lending services to the SME marketplace will enable Shawbrook to extend its offer for credit-worthy businesses seeking finance to grow and expand.

Shawbrook Annual report and accounts: highlights

– Total lending as at December 2013 of £1.4bn

– Originations of £1bn in new loans to SMEs and consumers in the UK during 2013

– New lending of over £700m to SMEs in that period

– Increase in deposit base of £539m to £1.46bn

– Regulatory capital increased by £58m to £143m

– Total capital ratio of 17.3% at Group level

Throughout 2013, Shawbrook has focused on the rapid organic growth of each of its business lines, maintaining its strong customer-focused philosophy as the bank has expanded. Over the last year the Bank has welcomed 44,000 new customers, now providing lending services to 52,000 customers and competitive savings products to over 40,000 customers.

Each of Shawbrook’s specialist lending businesses delivered significant growth in 2013:

– Commercial Property Lending grew by 170% to £541m (£201m in 2012)

– Asset Finance grew by 28% to £447m (£349m 2012)

– Secured Lending grew by 81% to £295m (£163m in 2012)

– Consumer Lending, the youngest lending business, grew by 291% to £115m (£29m in 2012, its first year)

– Centric Commercial Finance joins Shawbrook with over £200m of SME advances

Shawbrook supports its funding through retail and business deposits. New customer deposits of £730m in 2013 increased the retail deposit balance from £924m at December 2012 to £1.46bn at December 2013.

Richard Pyman, CEO of Shawbrook Bank, said: “2013 was a pivotal year for Shawbrook. Our specialist lending teams have focused on delivering a quality service with an unwavering emphasis on human underwriting and simple, straightforward processes. The result is outstanding organic growth across the business in 2013, and a significant rise in SME lending. We are in excellent shape for future growth in 2014 and beyond.”

“The acquisition of Centric Commercial Finance is an exciting strategic move for Shawbrook. We can now offer SMEs a broader range of funding services to support their growth aspirations, and the move will enable Shawbrook to become an even more prominent business lending bank. Centric’s dedication to traditional customer service and tailored lending solutions fits very nicely with our own, and we have ambitious plans to grow the business under Shawbrook this year.”

John Onslow, chief executive of Centric Commercial Finance, said: “We are delighted to be part of the Shawbrook family. We have been seeking a partner to support our growth ambitions and have a strong owner in Shawbrook that will enable us to drive further business growth. This is a natural match, both in terms of our product offering and because we share the same values and customer service ethos in meeting the ambitions of SMEs in the UK.”

Life begins at 50 for SME high-fliers

New research from the Business Growth Programme (BGP) at Cranfield School of Management shows that many of the owner-managers of the UK’s fastest growing businesses are 50 years old and older, shattering media perceptions of young entrepreneurs being the chief engineers of SME success stories.

The research sees the launch of the first Cranfield BGP Growth Barometer that takes the pulse of fast growing owner-managed-business on a quarterly basis. The results for the first quarter of this year comprise responses from 171 owner-managers who had attended Cranfield University’s BGP in recent years and whose companies are beyond the start-up phase. They have an average turnover of £5m.

Key findings from the research include:

– 54% of the owner-managers surveyed were 50-plus, while only 2% were 30 or younger

– The performances of these businesses are phenomenal with the average business growing revenues by 19% and employment creation by 21%

– These businesses have grown their revenues over three and a half times faster than GDP growth: 11.5% compared to 3.1%

– They have created jobs at a rate of over seven times faster than that of the UK economy

– The average forecast for revenue growth over the coming year is 22%, whilst that for profit growth is 29%, against predicted UK GDP growth of 3.6%

– Employment creation is expected to continue with pace at a rate of 10% growth and a 16% rise in exports is predicted

Interestingly, these predominantly older entrepreneurs also experienced a much higher 47% growth in profits over revenue over the 12 month period, indicating the success that these businesses are having in growing margins as well as revenues. This high margin growth also illustrates the robustness of the high performance manifested by these businesses.

The research was led by Professor Andrew Burke and Dr Stephanie Hussels of Cranfield University’s Business Growth Programme, the UK’s longest running programme for the development of owner-managers. The Business Growth Programme was set up 26 years ago and is the largest and longest running growth programme for entrepreneurs running small businesses. Over 1,500 owner managers have participated in BGP since its formation.

The results indicate that the entrepreneurial economy expects a big uplift in business performance and the economy over the next year. Interestingly, those surveyed said that the main drivers of this growth are not a boost from the economic recovery but a focus on core managerial and leadership activities. The top five drivers of business performance are senior management actions such as vision, strategy, senior leadership, innovation, operational efficiency, and sales and marketing.

Responding to the findings, Andrew said: “The findings of this survey fascinate us both as academics and as business experts. This first business barometer of owner managers form Cranfield’s BGP programme reveals a much more diverse high performance entrepreneurial base in the UK economy than previously imagined, with most entrepreneurs over 50 and running businesses right across the economy’s industrial base.

“The performance of these businesses over the last year has been exceptional and their expected performance over the next 12 months is expected to continue at this impressive level. The results indicate that Britain’s entrepreneurial economy will help ensure a broad based recovery across many industries. It will lead in job creation in the economy and make major gains in export growth which will help our balance of trade.

“The BGP enables owner-managers to successfully apply management and business theories to their own companies. The owner-managers surveyed here are telling us that their investment in knowledge has really paid off, and is driving the exceptional performances seen by their businesses. They do not feel reliant on the macro economy but are driving their businesses through managerial techniques, which enable self-determination.

“Overall, the results indicate that Britain’s ambitious entrepreneurial economy is in rude health.”

Former Business Growth Programme participants concurred. Michael Wright, of Riviera Travel ltd, commented: “In the past five years we have achieved revenue growth of 20% per annum and for the year 2014 we are currently 21% ahead, so good news. Profit will rise in line and staff recruitment growth by less, probably about 10%, thus maintaining efficiency of operation.

“What is driving this is improved distribution, more repeat purchase, additional product and even more attention to product quality. This is putting more pressure on our competitors. These achievements have occurred despite a flat year for travel.

“As UK GDP growth rate has been pretty modest, our business growth cannot be due to general economy improvement. It is more to do with getting things right within

the company and the demographic.”

Manufacturing figures reflect positively on UK exports

Photo caption: Carl Hasty, director, Smart Currency Business

The Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) reports a slight fall, from 57.3 in April to 57.0. However, a figure above 50 is still a sign of growth in the sector. The manufacturing sector is also reported to have grown every month since March 2013.

Carl Hasty, director of international money transfer specialist Smart Currency Business, said: “The PMI reports a rise in new export orders in May for the fourteenth month in a row. I’ve witnessed some of this growth through my clients, who have cultivated it through more funding – including from savings on currency costs – and improved systems and processes.

“The PMI findings reflect the turnaround that the UK economy has enjoyed this year, and breathes life back into the government’s plans to hit the £1tn export mark by 2020.

“However, there is still a lot that needs to be done in order for the target to be feasibly achieved. UK exporters need to be aware of the wealth of support that is available to them, and how they can access it, whether this is through government bodies like the United Kingdom Trade and Investment (UKTI), or the private sector.”

Aldermore ranked third in list of Funding for Lending Scheme participants for lending to SMEs

Figures released by the Bank of England yesterday placed Aldermore third in a list of participants in the Funding for Lending Scheme (FLS).

Aldermore’s net lending to SMEs as part of the scheme in the first quarter of 2014 was £88m.

This continues the bank’s sustained increase in lending to UK SMEs. Aldermore’s total lending to SMEs last year (2013 calendar year) was up 53% to £1.69bn, compared with £1.1bn in 2012.

Commenting on the figures, Aldermore chief executive Phillip Monks said: “With the economic recovery taking shape it has never been more important to ensure continued lending to small businesses up and down the country. I am delighted that Aldermore is third in the list of net lenders in the Funding for Lending Scheme and that we are increasing our loan book, especially at a time when many are pulling back from the market.

“Banks need to focus on making it easier for SMEs to access finance and provide the essential support and customer service they need above and beyond simply providing funds. We are determined to continue to support SMEs and increase our lending in the coming year.”

Bond prices continue to defy gravity

Over the past week, yields on 10-year US Treasuries reached their lowest level for a year, while the S&P 500 reached a new all-time high. A similar trend is seen across the global developed markets, but it begs the question whether equity investors are too sanguine or bond investors too pessimistic.

Neither bond nor equity markets, in general, are cheap. But we believe bonds are clearly the more expensive asset class and the most susceptible to a correction of their gravity-defying trend. Our view that a gradual improvement in the global economic outlook will continue suggests little upside for low-yielding government bonds, with risks skewed toward a rise in yields by year-end.

To be sure there are more negative than positive risks around the continued gradual improvement in growth that we think is the most likely outcome for the global economy and markets this year. On the negative side, you have the Ukraine crisis, concerns about China’s banking system and slowing growth, the possibility that interest rates might be increased prematurely in the US or that expected easing may not materialise in the eurozone. Potential positive surprises are limited by comparison – more aggressive easing than expected in the eurozone and/or stronger growth and earnings than expected in the major economies.

Still, bond yields are so low (prices high) that it would take a fairly dramatic deterioration in the global economic outlook to push them substantially lower. For bondholders, yields are also near or below inflation, providing little real (inflation-adjusted) income.

Equities on the other hand are generally around what we would consider to be fair value on a longer-term basis. Not cheap but not expensive either, and attractively valued relative to bonds. Yields on 10-year Treasuries have dipped below 2.5% for the first time in a year, but we see them rising to around 3% (prices falling) by year-end amid a continued economic recovery.

Equities – Japan equities shrug off sales tax rise

Japan’s 1 April consumption tax hike was the first in 17 years, but we think fears of a market fall-out like the one that followed the 1997 increase are unfounded. That last rise took place against a banking sector that was near-insolvent and just ahead of the Asia economic crisis – neither is the case now.

So far in 2014, the market has tracked the same path as in 1997 (see chart overleaf, representing three key sectors that account for 26% of the TOPIX index), with the three sectors gaining 7% on average since the end of March and the retail sector leading at +5%. But we don’t expect consumption to falter as it did in 1997, and see Japanese equities trading in line with generally modest gains in global equities this year.

Bonds – hint of divergence between US and UK

Messages from the US and UK last week revealed a potential divergence in interest rate policy. While the Federal Reserve (Fed) minutes revealed no new information, New York Fed president William Dudley later in the week offered three reasons to keep longer-term rates below historical averages: i) lingering effects of the financial crisis, including higher precautionary savings and less investment; ii) demographics – slower growth of the labour force due to the ageing population and moderate productivity growth; iii) regulations requiring banks to maintain higher capital requirements.

Meanwhile, the latest Bank of England minutes were slightly more hawkish. Some members believe that the “monetary policy decision was becoming more balanced”, indicating they stand ready to vote for an earlier-than expected rate rise. With the 10-year gilt yield at 2.6%, we don’t believe it is pricing in the current pace of the recovery. We think improving growth and a tight labour market will push yields higher this year.

Businesses need to avoid false economy of machine translation

Following the latest news that Microsoft has enabled an instant translation feature for Skype, Geoffrey Bowden, general secretary of the Association of Translation Companies (ATC), warns of the dangers for businesses relying on such basic services, and argues the need for them to invest in the services of language service providers when doing business overseas.

Geoffrey commented on the growing disconnect between business and cultural needs: “This latest development brings to light the potential dangers of businesses underestimating the importance of cultural needs. While translation services such as these may be convenient for personal use, the value of cultural knowledge when building relationships in business is often underestimated. The ability to really get to grips with a business culture will be considerably lessened by an insensitivity towards a different language.

“In such a fast moving world, there is an obvious need for quick and easy translation. However, it must be noted that translation tools such as these are in no way fool-proof, and may create a false impression that effective translation can take place through instant software. Although this may work well for websites such as Twitter and other similar social networks where imperfections in translation are acceptable, it is not appropriate for businesses to think these tools are an effective and accurate means of translating large volumes of information.

“If a business would wish to make use of a similar feature, it is recommended that they seek the advice and support of a translation company belonging to a professional body such as the Association of Translation Companies.”

Don’t waste window of opportunity to reform EU – Cridland

As voters across the Continent give all European leaders cause to reflect on the EU’s agenda for the years ahead, the CBI set out the business vision for a reformed EU focussing on boosting jobs and raising living standards. It urged all politicians not to waste the opportunity for change.

Speaking at an event alongside former Prime Minister Tony Blair, CBI director-general John Cridland set out his priorities for EU reform and highlight four specific areas where the EU must change:

The EU must be outward-looking, agreeing more trade deals, such as with the US – a once in a lifetime opportunity

The EU’s national leaders must urgently make a political commitment to give impetus to completing the Single Market and tackling the regulatory burden

The EU should do more of what it does well, like trade and the Single Market, and less of what it does badly – there should be a moratorium on any new legislation where there is a strong argument for national decision-making

The EU must introduce safeguards as the Eurozone integrates to protect the Single Market for countries outside the Euro.

John said: “The recent European elections have focused the mind on the challenge facing politicians. With growth only just returning and youth unemployment across Europe still over 20% it is no wonder people want the EU to change. Leaders across Europe are recognising this – how could they not given the shock to the system from these results across the Continent?

“With challenge comes opportunity, a chance for a new look at what Europe does and how it goes about it in the twenty-first century. A chance for change.

“The starting point for that vision is a global perspective, we need to look outwards to the world as it changes. Our membership of a reformed EU is the best platform to do that. We must not forget the value to the British economy of having access to a market of over 500 million people.”

On the business vision for reform, he said: “Businesses large and small are clear that membership of the EU is in the UK’s national interest. But the status quo won’t do, we cannot waste this window of opportunity with a new Parliament and Commission this year to achieve a reformed EU.

“There must be a greater sense of urgency to boost the Single Market, sign trade deals and make sure the EU works for all Member States whether in the Eurozone or not. We must improve regulation and the new Commissioners will need to resist the temptation to reach for the regulatory lever. We need an EU that is making a genuine effort at subsidiarity, allowing member states including national parliaments to take the lead where Europe isn’t needed.

“Reform is achievable but we’ll need our MEPs of all colours, many of them new, fully engaged, working hard and building alliances.”

The CBI set out its business vision for a reformed EU in a landmark report in 2013.

Greater Birmingham, Solihull and Black Country SMEs bank on new £56m growth fund

Businesses across Greater Birmingham, Solihull and the Black Country have an opportunity to access finance to grow and create jobs as part of a new £56m Mezzanine Fund. The fund will be the largest individual growth capital fund for small to medium sized businesses (SMEs) in the West Midlands.

Managed by Finance Birmingham, a growing provider of growth capital, the fund is expected to help more than 40 businesses and create or safeguard 5,000 jobs across the region over the next five years.

The £56m fund is the result of a groundbreaking public and private sector partnership between the Greater Birmingham & Solihull Local Enterprise Partnership (GBSLEP), the Black Country LEP and the West Midlands Pension Fund. In addition to funding from the Government’s Regional Growth Fund, cash has been added from the two LEPs from their Growing Places allocations.

Businesses will be able to apply for loans of between £250,000 and £2m to fund development and growth plans. Typical investments are expected to be around £1m.

The funds will be given as mezzanine loans – an innovative finance, which sits between traditional debt and equity and avoids part ownership by investors. This type of funding is in short supply in the region and provides a solution for businesses, which need funds quickly or have less security to offer traditional funders, despite performing well. Finance Birmingham’s Mezzanine Fund will run from May 2014 to March 2019.

Finance Birmingham is calling for businesses with ambition and a viable plan for growth to get in touch to talk about how they can help make their plans a reality. All sectors and all uses of funds will be considered.

Sir Albert Bore, leader of Birmingham City Council, said: “This fund demonstrates how public and private funds can be structured and leveraged to create a dynamic resource for growing businesses across the West Midlands. Our region is home to a growing and diverse range of entrepreneurs who, with the right support and backing, can create jobs and boost the local economy.

“The fund also provides a model for those in other parts of the UK, on how public and private partners can work together to address some of the biggest issues facing business growth – in this case, that is much needed funding.”

With the limited appetite of pension funds for investing in business support schemes, the West Midlands Pension Fund’s backing of the Mezzanine is being seen as a clear sign of confidence in its model and the potential of the region’s SMEs to deliver significant returns and economic growth. The West Midlands Pension Fund will provide 50% of the money invested.

Pat Hanlon, GBSLEP board director, said: “The Mezzanine Fund is an important step forward for businesses across Greater Birmingham, Solihull and the Black Country as it not only fills a gap in the market but also adds to the suite of funds being managed by Finance Birmingham and other providers.

“This shows good collaboration between the two LEPs and the private sector, leveraging in funding way beyond the initial allocation from the Regional Growth Fund.

“It is also an important sign of our collective ability to deliver innovative finance products and recycle the returns we have made from investments via funds like Growing Places, to benefit even more companies.”

Councillor Turner of the West Midlands Pension Fund, added: “The Mezzanine Fund will be a catalyst for growing businesses across the West Midlands. With access to finance still recognised as one of the key barriers to SMEs expanding their operations, this fund will ensure that our local talent is not stifled by the confines of more traditional approaches to lending.”

Sue Summers, Chief Executive of Finance Birmingham, said: “The Mezzanine Fund will be the largest individual growth capital fund for small to medium sized businesses (SMEs) in the West Midlands. Its significant scale means that not only will we be able to support local businesses that need finance to achieve the growth they are capable of, but that we will be able to attract other high growth firms to the area, support job creation and build our local entrepreneur eco-system.”

For further information about the funding available and to apply, visit www.financebirmingham.com, or call a member of the Finance Birmingham team on 0121 233 4903.