Economic outlook - SMEs ignored despite downturn

If you were having a good morning, having enjoyed a nice boiled egg with soldiers, then perhaps it is best to stop reading now so that you do not spoil the rest of your day. Reading about the economy can bring, in the main, tidings of gloom sufficient to sour the milk in your tea.

The reason for such a warning is that we are only half way through the year and the economy, which many feared was in a difficult state at the beginning of January as a result of the growing consequences of the credit crisis, is now in an even worse state.

History

In January's issue of PB, the prospects were not exactly brilliant either; the Confederation of British Industry predicted gross domestic product growth of only 2% for the year. Now the outlook is even worse, with the latest statistics from the Confederation of British Industry forecasting a meagre 1.7% growth in GDP during 2008.

According to the voice of British business, there are even more reasons for pessimism as far as the economy is concerned. The slowdown already underway in consumer spending is set to intensify, it said, driving consumption growth down to a paltry 0.7% in 2009, potentially the lowest level since the dark days of 1992 when it stood at 0.5%. At the same time, the trade body forecasts that, as the UK economy slows, the global financial environment is only making matters worse, with record high oil prices and steep increases in commodity costs pushing inflation up.

The CBI is not the only body making gloomy predictions. At last month's annual Mansion House Speech, Mervyn King, the Governor of the Bank of England, declared that the UK faces its "most difficult economic challenge for two decades", and agreed with the notion that inflation is set to rise while growth and house prices are likely to fall.

Despite the seriousness of the national economic predicament, it would appear that the voice of the insurance broker is not being heard when it comes to lobbying the government. According to Simon Briault, spokesman for the Federation of Small Businesses, a recent survey of senior management in over 9,000 small UK businesses showed that "the fact seems to be that, when the government confers with business, it's really only big business that tends to be consulted.

"For example, the government recently asked about changes to employment law - agency law changes in particular - which are very important for business; yet the consultation was conducted between the government, big business and the unions behind closed doors in smoky rooms. It's a shame, because SMEs produce over 50% of UK GDP but they are being left out of debates."

Despite such criticism, it is important not to get carried away, said Stephen Lark, group managing director of broker Lark: "I would say so far that the economy is not having a terrible impact on insurance brokers. The biggest threat we see usually when there's an economic turndown is an increasing number of businesses going bust; however we're not at that stage yet, even though the press has been all dark and gloomy."

Overall

That is not being glib about the consequences of the economic difficulties for other businesses, he added: "I think I'd be concerned in terms of the wider economy. Retail businesses and the property sector are going to find it pretty tough but, at this stage, we're not finding that it's having a particular impact on our business."

The slowing economy should also help cut the rise in inflation, which is above the government's official target of 2%. Perhaps breakfast hasn't been so bad after all, though with the future of interest rates movements in the balance there is the feeling that there could be worse to come.

SLOWING FAST

- The Organisation for Economic Co-operation and Development has cut its forecast for UK economic growth in 2008 to 1.8% and to 1.4% in 2009. This is more pessimistic than Chancellor of the Exchequer Alistair Darling's view that the UK economy will grow by between 1.75% and 2.25% in 2008 and by 2.25% to 2.75% in 2009.

- The CBI predicts that the consumer price index rate of inflation will exceed 3% for the remainder of 2008, peaking at 3.8% in the third quarter - well above government targets.