Influential economist Roger Bootle says the corporate sector is primed to exploit the fallout for the public sector from the comprehensive spending review, though he expects growth to remain sluggish in 2011, ending at one percent.
In a note from Deloitte in its latest economic review, Bootle says that between corporation tax likely falling to 24 percent in the next five years and business gaining access to parts of economy that it has not been able to serve before, “a wealth of opportunities for the private sector should emerge” for businesses.
Bootle sounded a warning for companies currently providing goods and services directly to the public sector now as he believes they will suffer from the level of “immediate retrenchment” in the sector. He added that falling consumer demand would hit companies reliant on the consumer and retail sectors, and that companies geared towards doing more business overseas than in the UK could suffer from fiscal squeezing in other countries.
But overall Bootle sees a brighter time ahead for UK business having spent the last couple of years slashing cost, headcount and unprofitable operations.
“It would be optimistic to think that firms can get through the fiscal storm entirely unscathed. Nonetheless, the corporate sector stands in a relatively good position to withstand the fiscal squeeze,” he says in the Deloitte note. “The corporate sector looks set to escape the direct effects of the tax and spending measures set to be implemented.”
He adds that increased business and consumer confidence, looser monetary policy and a lower exchange rate would mean that, in the longer term, businesses may gain access to domestic markets that have been traditionally fulfilled by the state.
“It seems unlikely that the corporate sector will be able to offset the weakness in the rest of the economy, especially when a weak global recovery is set to prevent exports from taking full advantage of their increased competitiveness. The economic recovery is set to remain sluggish at best,” he says.
“But there are a number of reasons to think that companies are in fairly good shape to deal with the adverse effects of the fiscal squeeze: profitability has held up well during the recession and business insolvencies have been low: meanwhile, the corporate sector’s balance sheet is less stretched than those of the household and public sectors.”
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