Economic outlook

Britain has weathered the global slowdown well and is in good shape for growth this year compared with other leading industrial nations. And with its competititve tax base and open regulatory environment, the country’s future as Europe’s most popular inward investment destination seems secure, reports Sean Cronin Bounceback for top spot Believe it or not, the UK is still experiencing an economic upturn which began as far back as 1992 the longest period of uninterrupted growth on record. While the pace of that growth has slowed considerably, the economy has proved to be more resilient than have most of its European neighbours. The UK government is forecasting growth in gross domestic product of 2.5-3% for the year ahead, while the CBI has a more conservative estimate of 2.4%. This outlook compares favourably with France and Germany the UK’s two main rivals for foreign investment into Europe. Although the French government is predicting 2.5% growth, the figure is being seen as ambitious. Meanwhile, the German government is forecasting growth of just 1.5% for its own economy. Britain is in good shape for a recovery, according to the CBI. “The rebound in global demand in 2002 has been anaemic, but the UK has weathered the storm better than other leading industrial nations and we still expect a decent recovery in the course of the year,” says CBI chief economist Ian McCafferty. Competition from east The UK is still the most favoured inward investment location in Europe, with 16% of market share, followed by France with 13%. But the UK is also seeing increased competition from the countries of Central and Eastern Europe, and last year saw a major decline in the number of new projects. According to Ernst & Young’s European Investment Monitor, the number of new inward investment projects fell 25% in the first half of last year compared with the same period in 2001. However, report author Mark Hughes believes that the UK is still an attractive investment location despite a slow year in 2002. “The UK has a liberal and open economy and we do have good research and development facilities and, at the international level, we are a transport hub. The UK also has a broadly competitive tax base and an open and inviting regulatory environment,” he says. With competition from Eastern Europe on the increase and the retraction of many big US corporations to their home market, the government realises it faces an uphill struggle to maintain the UK’s role as the first choice in Europe for potential investors. An important part of the government’s strategy to attract and retain investors at regional centres of excellence has been the development of industry clusters. An example is the science park in York. One recent arrival to the UK, US company ETA, which is developing a cure for winter depression, jet lag and sleeping disorders, says it decided to move to York Science Park because of the university’s research facility and personnel. Similarly, computer giant IBM chose Greenock last September as the site for its second customer service centre because of the local skilled labour pool. In the year ahead, the main uncertainty facing potential inward investors into the UK will be the timing of possible future entry into the eurozone. While the UK has continued to enjoy significant inflows of direct investment even after the launch of the euro, some companies have cited the government’s prevarication over the issue as a reason for delaying investment, or even for pulling out of the UK. However, the effect will be less drastic than some fear, according to the Economist Intelligence Unit. “Non-membership of European Monetary Union is likely to have an adverse impact on the UK’s ability to attract and retain foreign direct investment in certain sectors, but this is likely to be less marked than supporters of EMU membership generally claim.” The improvement of the UK’s transport infrastructure will also be a major factor in the years ahead. The government has pledged an annual 12% increase in transport spending, from £7.7bn last year to £11bn by 2005-06. A raft of big schemes are planned across the country, including new lines for the Greater Manchester Metrolink, a major light rail line in Liverpool and the second phase of the Nottingham Express Transit system. But it is the South East that will benefit from the most significant regional upgrade of the transport network, with the construction of Heathrow Airport’s terminal 5, and expansion of other airports, including Luton and Stansted. In addition, the rail network in the region will see significant improvements, with the proposal of major schemes such as CrossRail, the East London Line extension and the ongoing Channel Tunnel Rail Link. New pattern for South East RICS planning officer Ewan Willars believes the planned transport improvements to the region will have a major impact on the way it is perceived by foreign investors. “If the government gets it right, it will fundamentally change the pattern of economic development across the South East,” he says. Another key development next year will be the creation of simplified planning zones a development that is going through the legislative process. This simplification will relax development controls in zones around the country, with the aim of reducing the amount of red tape that foreign investors sometimes need to deal with. The simplified zones will be chosen by the regional development agencies throughout the UK. Software: Security and VPNs set for boost The UK is fast emerging as one of Europe’s critical locations for e-business solutions, applications and research. It is one of the most competitive and advanced locations in terms of information communications and technology and the most deregulated market in Europe. Within the UK market, a strong “teleculture” has developed. Telecommunications costs in the UK are among the lowest in Europe, owing to early deregulation of the industry in the UK and to increasing globalisation. The UK has the largest fibre optic network in Western Europe, with more than 3m miles of cable, and 400 licensed telecoms operators. While IT spending on security and virtual private networks (VPNs) is expected to increase substantially this year, many technology decision-makers are planning cutbacks in IT outsourcing and consultancy. However, the UK remains one of Europe’s leading centres for outsourced contact centres and at the forefront of webintegrated contact centre technology and customer relationship management solutions. Economic outlook Sectors being targeted by various regions of the UK Scotland East West Midlands Biotechnology Life sciences Healthcare and pharmaceuticals Electronics, software/ e-business ICT Electronics and telecommunications, software Creative Industries Media and cultural Services and e-business Financial services Financial and business services Logistics and e-fulfilment Contact centres Transport gateways Food and drink Food and drink Agriculture and food Automotive Aerospace Automotive Added-value engineering, rubber and plastics Forestry Hi-tech and advanced engineering North London East Midlands Life sciences, pharmaceuticals Biotechnology, healthcare Healthcare, especially bioscience Chemicals ICT Creative industries Consumer electronics and microelectronics, software development Media, creative and cultural Environmental technologies, power generation Call centres and SSC Contact centres Food & drink Manufacturing Tourism and hospitality, leisure & retail High-performance engineering Automotive Environmental technologies Clothing and textiles Engineering Production industries Research and development Source: Ernst & Young Automotive: On niche and premium route Around 850,000 people are employed in the UK automotive industry responsible for 5% of the global industry in car production. The UK is one of the five major automotive manufacturing countries in Europe, with annual output worth £47bn, of which £28bn is accounted for by the vehicle manufacturers, £12bn by components and £5bn by commercial vehicle makers. Automotive manufacturing has proved to be one the most resilient sectors of the economy. While European Union projects slowed by 15% compared to the previous year, the UK automotive industry saw an increase in new reported projects, with the announcement of 122 projects in the first half of 2002 compared with 93 in the same period for the previous year. There has also been a marked change in the positioning of the UK industry. Production in the niche and premium car sectors is forecast to grow from 13% in 1999 to 27% in 2004. What makes the UK automotive industry so progressive? The UK is recognised as being at the forefront of logistics with excellent facilities and support. It has a highly skilled and flexible workforce. There are communities of trained and experienced automotive workers in clusters around the country, notably in West Midlands and Wales, a range of industry-wide skills and an excellent support service. However, while Britain is still attracting more new assembly projects than any of its European rivals, the Czech Republic is now the most popular automotive investment destination, with the main driver being components manufacturing. To stave off such increasingly fierce competition from Central and Eastern Europe, the UK government recognises that the industry will need to maintain its investment in research and development and in quality systems. Economic outlook Sectors being targeted by various regions of the UK South East North West South West Pharma, bio and healthcare Biotechnology Biotechnology, medical devices Electronics, software, telecoms and networks Chemicals ICT New media Digital industries Financial services Financial and professional services Creative industries Marine and offshore technologies Marine technology Financial and professional services Leisure and tourism Tourism Maritime Environmental technologies Transport and logistics Tourism Food and drink Aerospace and defence Environmental technology, energy Aerospace Automotive Food and drink Automotive Knowledge base, property and construction Aerospace Advanced engineering Automotive Direct marketing Advanced engineering Textiles Wales Northern Ireland Yorkshire/Humber Life sciences Life and health sciences Bioscience Semiconductors, software, telecoms Chemicals Chemicals New media Electronics, software, telecoms Digital industries Contact centres Call centres Food and drink Optoelectronics Advanced engineering and metals Source: Ernst & Young Average earnings (£) Region Average gross annual earnings Average gross weekly earnings Average gross hourly earnings Great Britain 24,603 464.70 11.73 North East 20,716 399.30 9.93 North West 22,487 426.80 10.75 Yorkshire/Humber 21,503 409.90 10.19 East Midlands 21,772 413 10.21 West Midlands 22,387 427.30 10.69 South West 22,359 421.70 10.60 East 22,699 459.60 11.47 London 34,762 624.10 16.23 South East 26,449 496.70 12.52 Wales 20,758 399.70 10.10 Scotland 22,016 427 10.66 Source: Office for National Statistics: New Earnings Survey 2002 Electronics and business services: Shift to smaller firms Britain has long been the leading European destination for investment in the electronics industry. Employing more than 400,000 people, the UK electronics sector is now the fifth largest in the world. It is also an industry in transition, as the drive to attract multibillion pound manufacturing plants has shifted to a focus on small- and medium-sized enterprises. Scotland has been the traditional hub of the industry but has hit by the slump in electronics manufacturing. It has lost around 15,000 electronics jobs in the past four years with the closure of plants operated by giants like Motorola, HP and Compaq. But the sector still accounts for around half of all Scottish manufacturing jobs. Both the Scottish Executive and Scottish Enterprise have launched an attempt to safeguard the future of the industry through the creation of technology institutes to help it to extend into more value-added areas. Major electronics companies with UK manufacturing plants include Compaq, Ericsson, Fujitsu, Samsung, Sharp, Sony and Toshiba.