UK service & manufacturing industries leaders in promoting recovery

Economic growth advantages include the ability to employ more individuals and a stable economy. Another advantage is that more goods and services are available and more importantly affordable to consumers.

The British Chambers of Commerce (BCC) had forecast that GDP would overtake its performance in the first quarter of this year in the autumn, but has now brought that forward to the second quarter. Economic growth picked up from 0.3% in 2012 to 1.8% in 2013. According to official data the services and manufacturing industries have been the main contributors to the growth.

So it’s time to crack open the Cristal and celebrate right? Not quite, I would start with a bottle of cava as there
are also disadvantages to economic growth. As businesses become more confident the market can become saturated with many types of products or conversely too much of a particular type of product is available and the demand decreases. Whilst this competition is great for the consumer, this can leave businesses with too much overhead and too little profit.

This is a dangerous time for businesses who will need to tread carefully as there will be a temptation to expand their operations too quickly which can lead to overtrading. Overtraded businesses enter a negative cycle, where an increase in expenses negatively impacts the net profit, which leads to less working capital, and that leads to increased borrowings, which in turn leads to increased expenses and the cycle continues. Overtraded businesses usually face cash flow problems and/or run out of working capital.

The glorious tidings of a recovering UK economy comes with muttered warnings that the recovery is largely built upon the precarious foundations of a booming housing market recovery and therefore runs the risk of eventually running out of steam.

Only time will tell on this one and it will be interesting to see whether we start to see a rise in corporate insolvency in a time of reported growth as some businesses become overconfident and potentially overtrade, increased competition forcing businesses to reduce their profit margins to remain competitive and of course let’s not forget the much discussed and inevitable hike in interest rates…