Download ECONOMIC INSIGHT MONTHLY BRIEFING FROM ICAEW’S ECONOMIC ADVISERS DECEMBER 2011

ECONOMIC INSIGHT
MONTHLY BRIEFING FROM ICAEW’S
ECONOMIC ADVISERS
DECEMBER 2011
UK ECONOMY TO LIMP
INTO NEW YEAR AS
GLOBAL GROWTH SLOWS
The UK economy is likely to stagnate at
best in the near term and may well be
contracting now according to recent
indicators. Both the Bank of England and
the Office for Budget Responsibility (OBR)
sharply downgraded their forecasts for
growth in 2012 in November as shortterm indicators such as the ICAEW/Grant
Thornton Business Confidence Monitor
showed a sharp drop off in business
confidence in the final quarter of 2011.
There is now widespread evidence that
the global economy is slowing sharply
as the uncertainty over the eurozone
plagues financial markets and growth in
real economic activity weakened the world
over. Even China and India have recently
reported a reduced pace of growth while
the eurozone and UK could well experience
recession through Q4 2011 and Q1 2012.
BUSINESS WITH CONFIDENCE
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The key question is whether policy-makers can do
enough to turn the economy around in 2012. Emerging
markets are unable to escape the slowdown but are likely
to have the monetary and fiscal policy firepower to turn
things around through 2012. However, the outlook for
the advanced economies of the West looks far tougher,
particularly in the eurozone.
OBR slashes UK growth forecasts
yet again
In the Autumn Statement, the OBR published its latest
forecast for the UK economy with yet another downward
revision to growth. The OBR now expects the UK
economy to grow by just 0.9% in 2011, down from its
previous projection of 1.7% in March 2011. However,
there was a far larger downward revision to its bullish
forecast for growth in 2012. The OBR now expects the
UK economy to expand by just 0.7% next year as the
economy looks set to contract in the final quarter of
2011 and growth prospects look increasingly uncertain
heading into the New Year.
3.5
Weaker growth forces Chancellor
3
to
issue more debt
2.5
Slower
growth means that public borrowing will be
around
£100bn higher than previously expected by
2
2015–16. The implication of this is that the government’s
1.5
deficit reduction is going to take longer and the UK
will
continue acquiring debt. By 2015–16, public sector
1
debt as a share of GDP will reach 77.7%, only marginally
0.5
down from 78.0% in 2014–15 as shown in Figure 2.
Previously, the OBR forecast that public debt would fall
0
below
70% of
GDP by
2015–16.
2010
2011
2012
2013
2014
2015
2016
OBR Autumn Statement
OBR March forecast
Figure 2: UK public sector debt share of GDP, %,
fiscal years
90
80
70
60
50
40
30
Figure 1: UK GDP growth, annual percentage change
3.5
20
10
0
2010–11
3
2011–12
2012–13 2013–14
OBR Autumn Statement
2014–15 2015–16
2016–17
OBR March forecast
2.5
Source: Office for Budget Responsibility
2
1.5
0.5
0
The key consequence of weaker growth is that the
Chancellor was forced to announce additional public
9
spending cuts for the next Parliament in order to stick to
8
his own fiscal mandate that national debt as a proportion
7 GDP should fall between 2014–15 and 2015–16.
of
6
Indeed,
in 2015–16 total managed expenditure by the
5 government is projected to be £17.2bn lower than
UK
4 the March forecast – meaning that the UK faces the
in
3
prospect
of two Parliaments of fiscal austerity measures.
10
1
2010
2011
2012
2013
OBR Autumn Statement
2014
2015
2016
OBR March forecast
Source: Office for Budget Responsibility
2
90
Although
Chancellor Osborne and the government have
insisted
the
weakness in the economy is due to problems
80
in
the
eurozone,
the OBR admitted to having completely
70
underestimated the extent of the real income squeeze
60
in 2011. The reality is that UK households have faced
50
the biggest two-year decline in living standards in the
40
post-war era as weak wage growth is outstripped by the
30
rising cost of living. The OBR now agrees, forecasting
a 2.3% drop in real household incomes in 2011 and
20
expecting the squeeze on living standards to continue in
10
2012, with a further 0.3% decline in real income before
0
returning
growth 2012–13
in 2013.2013–14 2014–15 2015–16 2016–17
2010–11 to2011–12
However, there
was still
room for optimism
for theforecast
OBR.
OBR Autumn
Statement
OBR March
They expect the UK economy to pick up to 2.1% growth
in 2013, although this is reliant on the eurozone recovering
to 1.6% growth and 9% business investment growth.
Indeed, the OBR forecasts a boom from 2014–16 with
GDP growth averaging 2.9% per annum, consumer
10
spending growing by 2.6% a year and business
9
investment growing by 38% in real terms. Unless the UK
8
dramatically
improves its competitiveness, this sort of
7
growth
performance could be hard to achieve.
6
5
4
3
2
However, by cutting back some current spending
1
commitments, the Chancellor was able to find sufficient
0
room
to push2011
through
several2013
capital 2014
investments
2010
2012
2015 as part
2016
of an array of pro-growth measures. The government
OBR Autumn Statement
OBR March forecast
announced
£5bn of capital additional infrastructure
spending including projects such as the London
Underground Northern Line extension to Battersea, the
electrification of the Trans Pennine train route and a
range of road building projects. While unlikely to provide
an immediate boost to growth, these measures should
%
support growth and job creation in the medium term.
60
50
40
30
20
10
0
1980
1985
Eurozone
1990
1995
US
2000
2005
2010
Emerging and
Developing Economies
3
3
2.5
2.5
2
2
Massive
upwards revision to public
1.5
sector job losses contributes to bleak
labour
market outlook
1
Further
0.5
public spending cuts inevitably mean more
public sector job losses but the OBR also revised how
0
many
jobs disappear per pound of public spending
2010
2011
2012
2013
2014
2015
2016
cut, so there has been a massive upward revision to the
Autumn Statement
OBR March
previouslyOBR
announced
400,000 public sector
job forecast
losses.
The OBR’s revised estimate for public sector job losses
between Q1 2011 and Q1 2017 came in at 710,000,
some 44% higher than previously estimated. Hence,
the private sector has even more work to do to fill in
90
the spare capacity created by public sector job losses.
80
The
70
result of this and the bleak economic outlook
that the OBR has now admitted that we are in
for an extended period of high unemployment.
50
Unemployment on the International Labor
40
Organisation measure is now expected to average
30
8.7% in 2012 – 0.6 percentage points higher than
20
the OBR’s March projection. The cumulative effect of
10
higher joblessness is that the claimant count measure
of
0 unemployment is projected to stand 357,000 higher
2010–11
2011–12
2012–13
2013–14 2014–15 2015–16 2016–17
in 2014
than
previously
expected.
is
60
OBR Autumn Statement
OBR March forecast
Figure 3: UK unemployment rate (ILO measure),
percentage of economically active population
10
9
8
7
6
5
4
3
2
1
0
2010
2011
2012
2013
2014
OBR Autumn Statement
2015
2016
The biggest uncertainty hanging over the global
0
and UK
the ongoing
2010economic
2011 outlook
2012 is 2013
2014 eurozone
2015
2016
debt crisis. Talks between eurozone governments are
OBR rhetoric
Autumn Statement
OBR March
forecast
ongoing and
has become stronger
recently,
but the world economy desperately needs firm actions
to bring the crisis under control. Recent data have
clearly pointed to a likely contraction in economic
activity across the euro area in the final quarter of 2011
90
– leading many to speculate that the eurozone is likely
80
to endure another technical recession. Further, talk of
70
a possible eurozone break-up has led to conjecture on
60
what the economic impact would be.
50
The Organisation for Economic Co-operation and
Development has forecast a ‘mild recession’ in the
30
eurozone through Q4 2011 and Q1 2012 and expects
20
the single currency area to expand by just 0.2%
10
in 2012. The OBR is more bullish, expecting 0.5%
growth.
Other commentators have speculated that
0
2010–11
2011–12
2012–13
2013–14
2014–15 deep
2015–16 2016–17
a euro
break-up
scenario
could
see another
recession, OBR
withAutumn
perhaps
a
3%
or
more
contraction
in
Statement
OBR March forecast
euro area output.
40
How much would this affect the global and UK
economy? The answer is: significantly, especially
since UK plc’s post financial crisis ‘business model’ is
heavily reliant on strong growth in exports and the
10
euro
area is by far the UK’s largest trading partner,
9
as
8 illustrated in Figure 4. The UK tends to sell around
half
of its merchandise exports to the euro area, while
7
only around one in five exports goes to emerging
6
economies, which although not unaffected by the
5
global economic slowdown at present, are still likely to
4
experience
relatively strong growth; probably growing
3
faster
than advanced economies by a factor of about
2
three. Hence, the UK real economy is likely to be hard
1
hit by any downturn in the eurozone, notwithstanding
0
the potential
impact on
financial
markets
and 2015
the
2010
2011
2012
2013
2014
2016
associated effects of this.
OBR Autumn Statement
Figure 4: UK merchandise export destination,
percentage share of total merchandise exports
to world
This bleaker picture has been corroborated by
recent outturns in the labour market data. Over the
three months to September, the unemployment
%
rate was 8.3%, up 0.4 percentage points from the
60
previous quarter and reaching its highest level since
January 1996. The timelier claimant count measure
50
of unemployment rose by 5,300 in October too,
suggesting labour market conditions remain weak
40
coming into Q4 2011; a view supported by the Q4
2011 ICAEW/Grant Thornton Business Confidence
30
Monitor, which pointed to weaker hiring intentions
from businesses amid an increasingly uncertain
20
environment.
%
60
50
40
30
20
10
10
0
1980
1985
Eurozone
1990
1995
OBR March forecast
OBR March forecast
Source: Office for Budget Responsibility
0
1980
Euro crisis hangs over global
economy
but how much will it
1
affect UK plc?
0.5
1.5
2000
US
2005
2010
Emerging and
Developing Economies
1985
1990
Eurozone
1995
US
2000
2005
2010
Emerging and
Developing Economies
Source: Macrobond; IMF DOTS database
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to deliver monthly economic briefings
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ECONOMIC INSIGHT
DECEMBER 2 011
2012 set to be another tough year as
‘flat is the new growth’
The economic outlook has darkened as the eurozone
crisis rumbles on and UK consumers remain squeezed
by real income declines caused by the surging cost of
living and weak earnings growth. While inflation looks
set to fall back sharply in 2012 providing some relief
to hard-hit consumers, the labour market remains
very weak and the latest update from OBR saw the
government admit that unemployment will rise towards
(although not quite reaching) 9% in 2012.
The increasingly challenging environment, especially in
the retail sector, led Arcadia owner Sir Philip Green to
declare that ‘flat is the new growth’. With about a 50%
chance of another recession in the UK and growth next
year set to be a very modest 0.7% on the OBR’s new
central forecast, Sir Philip’s remarks match an increasingly
gloomy reality. The good news is that the fall in inflation
will ease the pace of real income decline in the UK.
However, with the economy very weak another year of
exceptionally loose monetary policy from the Bank of
England seems likely, with interest rates on hold and
further quantitative easing likely in 2012.
Key dates for the month ahead:
DATE
EVENT / RELEASE
PREDICTION
13 December
Consumer price index
Inflation falls back again
14 December
UK labour market
Unemployment edges up
Economic Insight
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