Glints of light amid the gloom

ON A day when millions of Britons were engulfed in the mounting melancholy of public sector cutbacks, one couple in Troon were completing the happy business of buying themselves a new home.

They were joined by another set of buyers in Newton Mearns, who had also purchased a new family residence from Mactaggart & Mickel. Those two sales - both on the day when Chancellor George Osborne confirmed his dreaded government spending cuts - put the Glasgow-based builder within easy reach of its weekly sales target.

Ed Monaghan, chief executive of Mactaggart & Mickel, says this proves the country's fiscal woes are "not universal". Though trading remains tough, business opportunities are out there amid gradually improving trading conditions.

"I look outside my window, and the roads are full of people going to and from work," Monaghan says. "There are still a lot of people in employment.

"I don't want to belittle the spending cuts - it was stark news and it will affect a lot of people. However, there are plenty of other people who are not affected by that, and who are getting on with their lives."

Though measures in areas such as consumer confidence, house prices and retail sales have remained tentative, there are signs that a grudging economic recovery may be emerging.

Corporate results have improved immensely as firms have cut both their debts and costs. Some businesses that appeared to be on the brink of death now appear to be moving from strength to strength.

British Airways on Friday moved back into the black, posting a better than expected half-year profit of 158 million after a wounding 292m loss at the same time last year. Ford has also sprung back to health, with a near 70 per cent jump in net income in the third quarter.

Despite warnings of another economic crisis, the business headlines were brimming with corporate good news stories last week, with Microsoft also reporting a 51 per cent rise in quarterly profits and WPP, the world's largest advertising and media group, announcing rocketing third-quarter sales in the UK.

Meanwhile, there has been evidence of modest improvement in areas such as manufacturing. Much of this appears to be driven by exports and investment.

The most startling ray of hope came on Tuesday, when the government's first estimate of third-quarter economic growth came in at twice the level predicted by City economists. Not surprisingly, the coalition government seized upon the 0.8 per cent expansion as evidence that the UK's economy could bear the brunt of forthcoming government cuts but the confounding GDP output left many scratching their heads.Households have been left wondering who to believe: the doomsayers and their warnings of a double dip, enthusiastic chief executives or the Treasury?

Together with the 1.2 per cent growth recorded in the second quarter, the six months to September have been the strongest seen in the UK for a decade. However, VAT increases from the beginning of next year, plus the start of 81 billion in government spending cuts, will dampen expansion in the coming months.

"We will almost certainly see slower growth rates over the next two or three quarters - there is little doubt about that," says Ross Walker, UK economist at Royal Bank of Scotland.

"But I think the recovery will be sustained in the sense that the economy is probably going to continue growing, rather than falling back into a double-dip recession. We have actually had a full year of growth now, but it hasn't really felt like it because we are coming from such a low base."

One of the hardest-hit areas - construction - also ranks among those that will feel the biggest impact from government cutbacks. Demand will suffer as authorities reduce expenditure on capital projects, while job losses will increase the reluctance of consumers to purchase homes.

Even so, Mactaggart & Mickel's Monaghan believes the industry will not be battered about in the same way as it was after the credit collapse, when a swathe of housebuilders and property developers folded. Those that remain, such as Mactaggart & Mickel, have re-aligned their businesses to deal with the new market realities.

"We are in for a long, steady and gentle recovery," Monaghan says. "2011 is not going to be fantastic, but it is not going to be as bad as 2008."

Positive signs elsewhere include figures released earlier this month from the Scottish manufacturing sector, which showed that exports climbed by 0.6 per cent between April and the end of June. Though figures for the entire year were 2.5 per cent lower than in the previous 12 months, the quarterly rise was regarded as a welcome improvement.

Peter Hughes, chief executive of Scottish Engineering, says the quarterly uptick was the industry's best performance for a decade. Having just completed his regular tour of the country, where he meets with engineering leaders from seven different districts, Hughes describes the general consensus as one of "fairly reasonable optimism".However, the primary problem remains the availability and cost of bank financing.

"The biggest single hassle we have got right now is not about getting orders, and it is not about getting meaner and leaner and fitter, which we have been doing for a number of years now and have become pretty good at," Hughes observes.

"Our biggest problem is that the banks are being totally and utterly unreasonable." He cites the case of one firm that was forced to pay for two separate consultancy reviews before its bank would cut the firm's overdraft charges from a variable rate of between 7 and 9 per cent.

"It was eventually reduced to 3 per cent," says Hughes, "so they got a result, but it should not have cost them 70,000 to get that result."

Economists say corporate finance will be a crucial factor in the coming recovery. Unlike the economic rebounds of the early Nineties or Noughties, when consumer spending led the way, the hallmark of this recovery will be exports and investment by business.

The good news on this front is the number of firms boasting relatively strong balance sheets and stable earnings, such as Scotland's Clyde Blowers, Weir Group and Aggreko. Meanwhile, many other international corporations outside the banking sector have rebuilt their financial balance sheets, giving them the ability to invest as the upturn takes hold.

"This is absolutely vital," says Walker of RBS. "The grounds for encouragement are that the non-financial corporate sector is in much better shape than it was in the early 1990s, or in the early part of this decade.

"That provides the basis for an investment-led recovery. It is now just a question of whether there is the confidence there to do so."

Brian Ashcroft, policy director of the Fraser of Allander Institute at Strathclyde University, says it is difficult to tell how sustainable the current recovery will be. Although he doesn't anticipate a double-dip recession, he highlights the fact that spending cuts will prove an obstacle to keeping the economic momentum.

"It's like bouncing a ball off the ground - the harder you throw it, the bigger the initial bounce-back," he says.

"What is happening here is you need something to keep the ball bouncing, because otherwise that energy is just going to dissipate."

Ashcroft adds that the recovery period will likely take longer than in recent recessions, as historical evidence suggests that the economic damage generated by a banking crisis takes more time to mend than that of a market-driven downturn.

Walker agrees: "We are going to get recovery, but it is not going to be as much fun as it has in the past, when it was led by consumer spending. Borrowing money and buying cars or flatscreen televisions is much more fun than corporate investment, but households are now trying to rebuild their balance sheets, and that is the economic reality."