Download ANNEX A - BCC VIEW ON CURRENT UK ECONOMIC CONTEXT

ANNEX A: BCC VIEW ON CURRENT UK ECONOMIC CONTEXT
The economic backdrop ahead of the 2016 Autumn Statement has become increasingly challenging.
UK ECONOMIC GROWTH PROSPECTS
The second official estimate for Q2 2016 GDP growth confirmed that the UK economy grew by 0.6%
in Q2 2016, up from the growth of 0.4% recorded in Q1. UK economic output is currently 7.7% above
its pre-recession peak. The first estimate of UK GDP also revealed that industrial production rose by
2.1% in the second quarter of 2016. the fastest rate of growth since Q3 1999.
In contrast to the official data, the latest BCC Quarterly Economy Survey (QES) of over 8,000
responding businesses revealed a much more subdued economic picture in Q2. In the service sector,
the balance of firms reporting a rise in domestic sales slowed to its lowest level since Q2 2013. In
manufacturing, most indicators remained weak by historical standards with the balance of firms
reporting a rise in domestic sales slowing to its lowest level since Q4 2012 (see Figure 1):
Figure 1: Domestic Sales
60
40
2Q16
4Q15
2Q15
4Q14
2Q14
4Q13
2Q13
4Q12
2Q12
4Q11
2Q11
4Q10
2Q10
4Q09
2Q09
4Q08
2Q08
4Q07
2Q07
4Q06
0
2Q06
% Balance
20
-20
-40
Services
Manufacturing
-60
Source: BCC QES, Q2 2016
Similarly, business confidence that profitability will improve declined in both manufacturing and
services in Q2. These statistics matter because the QES, as one of the largest business surveys in the
UK, is a reliable bellwether for the UK economy. The BCC recently downgraded its UK GDP growth
forecast for 2016 to 1.8%, from the previous pre-EU referendum vote forecast of 2.2%. The BCC has
also downgraded its forecast for 2017 from 2.3% to 1.0% and for 2018 from 2.4% to 1.8%.
REBALANCING THE ECONOMY
The UK's progress in rebalancing the economy towards exports remains painfully slow and the UK is
still too reliant on consumer spending to support growth. The UK’s trade deficit widened once again
to £15.7 billion in Q2 2016, the highest on record. The UK's current account deficit stood at 6.9% of
GDP in Q1 2016 (latest available), the second highest on record and almost seven times the historic
average of -1%. The size of our current account deficit means that the UK is more exposed to external
shocks and risks a further downgrade to its credit rating. Although business investment rose by 0.5%
in Q2 2016, it was still 0.8% lower in annual terms. In contrast, consumer spending rose by 0.9% in Q2
2016, the 6th successive quarter of growth and accounted for almost all of the growth recorded in the
quarter. In annual terms, consumer spending rose by 3.0%.
Overall, the UK's export performance remains unacceptably weak and little progress is being made.
We could still see an improvement in the UK’s trade position in the coming months with Sterling at
medium-term lows and as the cut in UK interest rates places further downward pressure on the pound,
making UK exports more price competitive. However, much of the positive Sterling effect could be
negated as many exporters also import and so could face higher cost pressures. While the contribution
of business investment will increase gradually, any improvement in net exports is likely to be very
modest, and without a major improvement will remain well below the levels needed to rebalance the
economy. More also needs to be done to address the regional imbalances between London and the
South East and the rest of the UK, primarily by boosting public and business investment in the later
without undermining the former.
UK DEBT
Despite entering the sixth year of fiscal austerity, public sector net debt currently stands at over 80%
of UK GDP, more than double pre-crisis levels. However, the decision to abandon the budget surplus
target was a sensible one, following the EU referendum result. The new fiscal framework must have
greater flexibility to meet changing economic circumstances and deliver a better balance between
cutting the deficit and supporting growth. More needs to be done to strengthen and widen the UK’s
tax base through measures to boost growth and productivity. This means in our view, using record
low borrowing costs to make investments in productive infrastructure that yield long-term benefits –
rather than for current spending on short-term stimulus measures.
EU REFERENDUM
Concerns over a slowing economy have been intensified by the political and economic uncertainty
that followed the historic decision to leave the European Union. A private poll1 of Chamber members
confirms that a high proportion of firms have already taken steps to pause/freeze or slow down their
business growth plans, investment plans and recruitment plans (see Figure 2).
Figure 2: How businesses have changed behaviour2
Revise(d) recruitment plans
Revise(d) investment planning
Revise(d) business/growth plan/strategy
Expand
12%
16%
25%
47%
44%
42%
33%
9%
31%
10%
20%
14%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Pause/freeze
Scale down
Unsure
1Poll of Chamber membership in England, Wales, and Northern Ireland. (Scotland is to be polled at a later date). Fieldwork period: 13 th to
20th July 2016. Number of responses: 2,195.
2Question asked: You said you have done, or plan to do, the following. What is the expected direction of travel of these plans? (asked those
who coded 'Already done this' or 'Not done, but my business plans to do this' at Q4): Base: 1,143. Please note that figure 2 refers only to
those respondents that said their business had or was planning to modify its behaviour in response to the referendum.
Chamber members are significantly more pessimistic about the prospects for their area and for the
UK as a whole. This demonstrates the need for consistent support and decisive measures that
engender confidence so that the micro-level confidence exhibited by firms does not deteriorate
further.
IMPLICATIONS FOR 2016 AUTUMN STATEMENT
Against the expected sharp slowdown in growth next year, and increasing political and economic
uncertainty, the focus of the 2016 Autumn Statement must be to boost business confidence. Chamber
members also remain concerned by the long-term structural issues facing the UK economy, including
the chronic underinvestment in the UK’s infrastructure.
The Government should use the extra fiscal headroom from abandoning the budget surplus target to
support firms looking to invest, and deliver on major infrastructure projects that will boost jobs and
growth.