UK economy 2004 - the first six months

The first half of 2004 has been a period of uncertainty driven by external political events and a range of legislative and economic changes.

While the UK remains under the threat of terrorist attack and with the political situation in Iraq continuing to undermine global stability, there is concern about the UK businesses that lack disaster recovery contingency plans, which is more than half of them. The Chartered Management Institute says that only 47% of managers have drawn up continuity plans with the rest displaying a 'dangerously cavalier' attitude towards potential disruption.

Of this 47%, just over half test these plans once a year, with one in 10 admitting they have done nothing to address the shortfalls revealed.

Also, in the first half of the year, small businesses once again came under fire from government plans to scrap the tax break for small to medium-sized enterprises investing in information technology - reinforcing complaints of a lack of support for small businesses and start-ups. This, together with the revisions to the Disability Discrimination Act coming into force, hit the sector hard.

Under the new terms of the Act, any business that provides a service to the public will have to make "reasonable adjustments to any physical barriers that may prevent disabled people using their service" - or incur fines of up to £50,000. Despite the penalty, the risk of being sued by a disabled customer and the possibility of missing out on the £50bn annual spending by the disabled community, many small businesses are ignoring the new terms of the Act due to the prohibitively high costs of upgrading buildings, equipment and signage.

Cost trends

A recent report by the British Chambers of Commerce revealed that the overall cost of regulation - introduced since 1997 - to SMEs has rocketed to £30bn, an increase of nearly 50% in seven years. And this trend shows no signs of slowing, with increasing regulation originating from Brussels impacting the UK. European directives currently account for 40% of all regulations affecting UK firms, including the hugely unpopular Working Time Directive - the single most expensive burden, which has cost industry more than £10bn since its introduction five years ago.

In a bid to cut these spiralling costs, the Minister of State for Work and Pensions has announced a far-reaching consultation with the Association of British Insurers and the Federation of Small Businesses. This will consider whether or not to withdraw the requirement for some small UK businesses to have employers' liability compulsory insurance. The move could affect up to 300,000 limited companies where the owner is the sole employee. The logic behind this is that removing the requirement will not only reduce costs for smaller businesses but also bring incorporated owners or sole employees in line with similar unincorporated businesses.

The insurance industry is calling for further areas to be considered, namely that this will lead to cases of EL not being purchased when it should be, for example, when employing seasonal staff. The move may also not reduce the costs of insurance for small businesses because insurance is usually on a package basis and EL cover is usually a small component of the package, reflecting the difficulties of sole traders claiming against themselves.

SMEs also continue to struggle as a result of failing measures by businesses to reduce payment times. A survey by Experian has shown no improvement in payment periods since 1999, when laws were introduced to help small businesses tackle the issue. It is believed that many are reluctant to use their new powers for fear of jeopardising future contracts - with the result that an estimated £20bn can be accounted for in debts that have dragged on beyond their payment periods.

Despite predictions to the contrary, fewer drivers are opting for 'cash for car', preferring to remain within company car schemes. But employers beware - fleet managers are exposing their organisations to unnecessary risks: four out of 10 opt-out drivers are cheating on their insurance premiums, with more than one-third having no cover for business use, according to a recent survey by training specialist Universal Driver Training. This is particularly alarming in light of the recent government findings identifying that up to one-third of all road-traffic accidents involve somebody who working at the time - accounting for up to 20 fatalities and 250 serious injuries per week. Furthermore, a staggering 85% of the UK's motor fleets are not carrying out even fundamental risk management. According to data gathered from 12,000 fleet policyholders over the past 18 months, only 15% are implementing a programme of measures such as checking driving licences, issuing driver handbooks, investigating accidents and conducting pre-employment checks of driver competency and experience.

While very large fleet operators tend to employ dedicated motor fleet managers, SMEs - with the exception of some hauliers - often do not have the benefit of such expertise in-house. As a result, many fail to understand their responsibility for the safety of employee drivers and gain potential cost benefits of implementing basic risk management measures.

Farming subsidies

Things are finally looking up for UK farmers. Following the mass exodus in 2003, with 44% of farmers opting out by selling their businesses for non-farming purposes, those electing to remain in the industry are optimistic about their futures.

A recent survey carried out by the Bank of Scotland and NFU Scotland revealed the majority of young farmers (those under 35 years old) are optimistic about their future. This year, 77% have underlined their commitment to remaining in the sector, a marked improvement on last year's figures.

The government has pledged £35m towards supporting British agriculture, which comes as a long-awaited shot in the arm for this particularly hard-hit sector. This includes free support for farmers from the Farm Business Advice service.

The recent reforms to the Common Agricultural Policy have changed the way in which farming subsidies are managed. Instead of rewarding farmers for the amount produced, which in the past led to the creation of the 'butter mountain' and the 'wine lake', farmers will now be able to claim subsidies according to how they manage their land, in terms of sound environmental and ecological policies. Although this will affect every farm differently, it is hoped that more UK farmers will now be able to claim higher subsidies.

With the supermarket giants controlling the supply chain and consumers demanding produce of uniform shape and size, and available all year round, farmers may find that only one-third of their produce, for example, is fit to supply a supermarket contract. The rest may end up as a lower value raw material in the manufacture of processed products, for example non-conforming apples may be sold to cider producers.

The recent calls to promote healthier eating should ultimately benefit the farming sector as the producers of the raw materials. The British Retail Consortium is lobbying the government for a co-ordinated approach in promoting a consistent public message on diet and exercise. The aim is to encourage and support consumers in adopting more physical activity and choosing balanced diets as the cornerstone of a healthier lifestyle - and food retailers have already ensured that healthy eating is now more accessible to a wider range of consumers than ever before.

There is widespread public concern about the government's move towards permitting genetically modified organisms. From 2005, one form of maize has been licensed for GM production, mainly for use as animal feed. The impact on the environment in terms of cross-pollination and on public health, whether eating a GM crop directly or indirectly via livestock fed on it, is impossible to predict.

Which way the property pendulum will swing is the subject of much debate and speculation, but the jury is still out on whether house prices will continue to rise or plummet as they did in the 1980s. The Bank of England's recent message of caution, however, outlining the growing risk that property prices will fall, after the pace of rises over the past year, warns buyers to move carefully. Faced with this uncertainty, small-time investors still succumbing to the UK's obsession with property would be well advised to turn their attention away from the residential market and instead focus on the more profitable and less risky commercial sector.

This may all change with the government's proposed introduction next year of Real Estate Investment Trusts - collective property investment vehicles where the investor owns shares in a fund that invests in either commercial or residential property. Already operating successfully in the US, France and Australia, REITs aim to provide an affordable way for individuals to break into the commercial property investment market, broaden their investment portfolio and provide a stable income stream with investment returns that compare well to direct property ownership.

REITs also offer tax benefits, with investors taxed purely on dividend income rather than the higher rental income or capital gains.

According to the Royal Institute of Chartered Surveyors, the number of direct commercial investors rose from 31% in 2002 to 40% in 2003 after poor returns on the stock market. In the past 10 years, commercial property has given 174% returns compared with 81% for equities.

With the current high level of house prices making it difficult to cover the costs of buy-to-let with rental income, buyers are reliant on continued capital gain for their return. And, with rents falling due to the surplus of houses to let, set against rising house prices, a correction in the market seems inevitable. It will become more and more common for groups of people to plough their funds into shops, offices or factories in a bid for high returns.

The continued strength of the property market is keeping the construction sector buoyant, with employers profiting from the widening of the EU to attract new migrant workers. A survey by construction specialist CITB-ConstructionSkills has revealed that 20% of construction workers in the South East do not speak English as their first language, with major implications for workplace health and safety issues caused by the language barrier.

Site managers are being encouraged to display warning signs in other languages establish whether there are other people on site who speak the same language as the new recruits and consider offering English classes.

The Health and Safety Executive has recently applied for funding to translate its literature into eight new languages. Improvements are slow to take place, however. An HSE investigation on 350 London sites resulted in 66 prohibition or improvement notices being issued, showing problems on nearly 20% of the sites surveyed.

The UK service industry is going from strength to strength, with business volumes growing at the fastest rate for a year and profitability growth at a three-year high, according to financial and business advisor Grant Thornton. However, it warns that rising wage costs and skills shortages could hold back the sector's future growth.

Technology uptake

This growth is likely to have been boosted by the adoption of technology among small businesses and the service sector. Figures published by the NatWest bank show that in 1996, for example, only 14% of small firms used e-mail compared with 82% today. Now, 92% of businesses use a computer, two-thirds have a website, half have networked systems and 20% have adopted wireless technology - predicted to double over the next 12 months.

In the retail sector, e-retail analyst IMRG has predicted that by 2009 one-quarter of all consumer transactions will be carried out remotely, via the internet, personal digital assistants or mobile phones. Substantial improvements in the number and quality of services on offer are expected this year, as retailers concentrate on building e-commerce offerings. The use of broadband and the introduction of ISIS, a government trust mark scheme to identify trustworthy retailers, will attract more customers online.

Research suggests that 80% of UK businesses expect increasing challenges over the next 12 months, yet 85% remain optimistic about the future. For the smallest businesses, it is an onerous task of keeping pace with change, resulting in a danger of over-optimism about the future of their business.

Many are burying their heads in the sand, choosing to ignore legislation, thereby placing their business at risk.