We contrast the UK, China and Italy as places to do business
Dominating international news last month was the UK referendum. As the vote drew nearer, and the outcome became increasingly hard to call, uncertainty began to take its toll on business decisions, constrained by the dire warnings from both sides. When the Leave campaign edged home by just 4%, uncertainty turned into near-paralysis. A new PM and Cabinet will set the course over the coming months. But for the SME sector, the impact on business two years, five years and a decade down the line remains uncertain. What can UK SMEs draw upon for a sense of direction?
UK in the cold clear light of day
The pound dramatically dropped in value in the early hours of June 24 as the votes were being declared although there has been a hesitant recovery. While rates are depressed, exporters will benefit – assuming they are not buying in from overseas to make their sales. After the summer break, we can look forward to discovering the priorities being set by the new administration. The SME community would welcome clear priorities being set – that will restore the stability in which businesses thrive, such as maintaining secure business relations with the EU and keeping corporation tax low. The appointment of an International Trade Secretary is a welcome initiative: let us hope that this will be followed up with actions to promote exports.
The business research and financial services specialist Coface has predicted that growth of GDP in the UK will again reduce in 2016, while public debt and public debt will increase. To ensure that growth halts completely and we return to recession, we require a clear understanding of Whitehall policy right across the spectrum.
Chinese economy slowing down
Compared with the uncertainty which is affecting the economic outlook in the UK, China is enjoying a period of comparable stability on its domestic front under President Xi Jinping. But projections of a slowdown in the Chinese economy continue. Atradius, the credit insurance specialist, forecasts in its latest country report that GDP growth in the country will to 6.3% pa in 2016, compared with 7.7% pa in 2012. Growth in industrial production is expected to fall even further.
What is the situation for SMEs in China? They often have to depend on shadow banking with inflated rates as it is tough to secure finance. This discourages many small businesses from raising funds to achieve growth (Coface report, 2016). As there is a large amount of debt and significant overcapacity in several sectors, the financial markets are volatile. This, in turn, could affect the number of investors and consumers willing to engage.
UK companies commissioning production in China should monitor the situation carefully as shipments may be delayed due to the lack of parts due to pressures on cash flow along the supply chain. The task of the Chinese authorities, according to Atradius, will be to reduce the weaknesses in the economy by expanding domestic consumption rather than simply investing and exporting below cost.
Growth in Italy but at a price
Italy has shown real growth in its underlying economy in the last four years, increasing GDP from -0.4% in 2014 to a potential 1.0% in 2017 (Atradius, 2016). No less important, Italian exports are expected to increase in the same period, with Germany, France. USA, UK and Switzerland heading the list of purchasers.
There are major stresses within the Italian economy, however. The government has reduced the gap in economic development between in the North and the South (the so-called mezzogiorno region). That process involves resolving the South’s high unemployment level and the corruption that is more prevalent in that region. Coface estimates the unemployment rate is as high as 40% amongst young people. This encourages many to move abroad to seek work, creating further pressure on the Italian economy today and into the future.
A member of the TAEFL team with experience of life in both Italy and the UK noted that “I have found that there is more career potential abroad. In Italy, it is hard to be promoted from your current job”.
So, what’s the forecast for SMEs?
Looking at the available statistics, it’s hard to predict the future for businesses trading internationally – especially the SMEs. Wherever the importance of SMEs is recognised, and they receive the support they deserve, they will thrive. The whole UK economy benefits. When business and government work together, and there is a favourable exchange rate, exporters should be able to win orders. This could be the making of a very bright year ahead for SMEs.