Download UK ECONOMIC FORECAST Q3 2012 – LAUNCH ISSUE BUSINESS WITH CoNfIdENCE icaew.com/ukeconomicforecast

UK ECONOMIC FORECAST
Q3 2012 – LAUNCH ISSUE
BUSINESS WITH confidence
icaew.com/ukeconomicforecast
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icaew.com/ukeconomicforecast
Introduction
Welcome to the first edition of the ICAEW Economic Forecast. The report
considers the outlook for the UK economy based on the views of ICAEW
Chartered Accountants running all types of businesses across the UK, surveyed
through the quarterly ICAEW/Grant Thornton UK Business Confidence Monitor
(BCM).
ICAEW’s forecasts for economic growth, business investment and the outlook
for the labour market are based on the historical correlations between BCM
indicators and official economic data. Analysis 1 undertaken in 2011, by Cebr,
ICAEW’s economic consultants, showed that BCM has successfully tracked
these economic indicators. It pointed to the weakening economic environment
at the end of 2007 and into 2008 and indicated the brief return to growth in
the third quarter of 2009.
Since its launch in 2004, data from the BCM has provided a strong steer on
the overall direction of travel in the economy – on business confidence,
financial performance, challenges and expectations. It includes a range of
business performance and planning indicators that build up a picture of how
different aspects of the economy are faring and how the economy is likely to
evolve in the coming months. We use this information to produce our quarterly
Economic Forecast.
1 ICAEW/Grant Thornton BCM: an indicator of future economic trends; icaew.com/bcm
icaew.com
ECONOMIC OUTLOOK
0
-1
-2
-3
-4
-5
2007
-1.0
2008
-4.0
2009
2010
0.8
2011
-0.5
2012f
.................................................
1
1.8
.................................................
2
.................................................
3.6
3
.................................................
4
.................................................
%
.................................................
Fig. 1 Real GDP – annual growth
0.9
2013f
Source: ONS, ICAEW forecasts
This first economic forecast
reveals that the economy
is set to contract in 2012 and
growth will be subdued in
2013. An investment-led
recovery looks unlikely and
the labour market could start
to deteriorate again.
2
The economy is set to contract for
2012 as a whole, and looks likely to
show only very weak growth next
year – ICAEW is forecasting a 0.5%
contraction in economic output for
2012 as a whole, followed by growth
of just 0.9% in 2013.
The latest data on UK economic
growth have not been encouraging
– the Office for National Statistics’
second estimate of economic activity
in Q2 2012 showed that the economy
shrank by 0.5% compared with the
previous quarter. This is the third
consecutive quarter of economic
contraction. Output in the production
industries fell by 0.9%, while in the
services sector output declined by
0.1%. Construction sector output
fell by a sharp 3.9%, though many
economists believe that data for this
sector may be inaccurate, painting
an overly bleak picture of the sector’s
performance. Nevertheless, the
overall picture is that the economy
is very weak indeed.
BCM leading indicators for economic
growth paint a weak picture of
the short-term outlook. The BCM
Confidence Index stood at +1.1 in Q3
2012, down from +12.0 the previous
quarter. This marked the fourth
largest quarterly decline in confidence
since BCM began. In line with falling
confidence, other key BCM indicators
show business performance slipping
back in the 12 months to Q3 2012.
Turnover and gross profits have grown
by 3.2% and 2.3% respectively, both
down from 4.1% for the 12 months
to Q2 as economic conditions remain
tough. Expectations for growth over
the coming 12 months have also
weakened.
icaew.com/ukeconomicforecast
Business Investment
-10
-15
-20
2007
-0.2
2008
-14.4
2009
-0.4
2010
2011
4.9
2012f
......................................
0
-5
1.3
......................................
5
......................................
10.9
......................................
10
......................................
% 15
......................................
Fig. 2 Business investment – annual growth
-0.9
2013f
Source: ONS, ICAEW forecasts
With confidence weak,
business investment growth is
likely to fall – ICAEW’s forecast
suggests a 0.9% fall in
business investment in 2013.
Business investment fell by 1.5% last
quarter, probably reflecting continued
caution given the weak economic
outlook. Business investment is 15.9%
below its pre-financial crisis peak,
illustrating just how much investment
has collapsed following the onset of
the financial crisis.
In this quarter’s BCM, businesses
report capital investment rising by
2.0% over the past year, broadly
unchanged from growth rates seen
over the previous three quarters,
but this is expected to slow over the
coming year. These BCM findings
suggest that the Office for Budget
Responsibility’s business investment
growth forecast of 6.4% for 2013 may
be very unrealistic. Indeed, ICAEW
predicts that business investment will,
in real terms, fall by 0.9% in 2013.
icaew.com/ukeconomicforecast
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Labour Market
2007
2008
0.0
2009
2010
2011
1.9
2012f
7
6.5
1.8
6
5.5
5.3
5
2013f
2007
5.7
2008
7.7
2009
7.8
2010
2011
8.1
2012f
...........................................
0
2.4
8
7.5
8.1
...........................................
1
2.2
.................................
2
3.5
.................................
3
.................................
4
.................................
5.0
.................................
5
.................................
% 6
...........................................
9
8.5
...........................................
%
...........................................
Fig. 4 Unemployment Rate, %
...........................................
Fig. 3 Average earnings – annual growth
8.4
2013f
Source: ONS, ICAEW forecasts
Employment and earnings
growth look set to remain
modest. Unemployment is
likely to start rising again –
we expect the unemployment
rate to average 8.4% next year.
Despite the overall bleak economic
news, the labour market has fared
better than expected in 2012. The
unemployment rate fell from 8.4%
in the final quarter of 2011 to 8.0%
in the second quarter of 2012.
However, increases in employment
have largely been driven by part-time
job creation. Part-time employment
now stands at a record high of 8.1m
– 9.0% higher than five years ago.
In contrast, full-time employment
is 1.7% lower. Furthermore, earnings
growth remains incredibly subdued,
standing at less than half typical
pre-financial crisis levels.
Forward-looking BCM labour market
indicators remain weak, with private
sector firms continuing to expect only
small increases to their headcount.
They expect employee numbers to
grow by 1.2% on average over the
coming year. With further public
4
sector job cuts planned throughout
the current Parliament, and the private
sector remaining cautious about job
creation, employment conditions are
likely to remain fragile. ICAEW expects
employment numbers to show zero
growth for 2012 as a whole and
growth of just 0.4% in 2013 as private
sector job creation struggles to offset
public sector job losses. As a result of
this, the unemployment rate is likely
to start rising again – ICAEW expects
the unemployment rate to average
8.1% this year and 8.4% next year.
BCM salary indicators suggest that
subdued pay growth is likely to
continue over the coming year. Firms
expect average total salaries to increase
by 1.1% over the next 12 months.
ICAEW expects total pay growth to
stand at 1.9% in 2012 and 1.8% in
2013 as a whole. This is less than half
the pre-financial crisis growth rate
of 4.3%.
icaew.com/ukeconomicforecast
Forecasting methodology
Headline economic forecasts
2007
2008
2009
2010
2011
2012f
2013f
+3.6%
-1.0%
-4.0%
+1.8%
+0.8%
-0.5%
+0.9%
+10.9%
-0.2%
-14.4%
-0.4%
+1.3%
+4.9%
-0.9%
2007
2008
2009
2010
2011
2012f
2013f
Earnings (total pay) – annual growth
+5.0%
+3.5%
+0.0%
+2.2%
+2.4%
+1.9%
+1.8%
Employment – annual growth
+0.7%
+0.7%
-1.6%
+0.2%
+0.5%
+0.0%
+0.4%
5.3%
5.7%
7.7%
7.8%
8.1%
8.1%
8.4%
Real GDP – annual growth
Business investment – annual growth
Labour market forecasts
Unemployment rate
ICAEW’s forecasts for economic
growth, business investment and the
outlook for the labour market are
based on the historical correlations
between ICAEW/Grant Thornton
Business Confidence Monitor (BCM)
indicators and official economic data.
BCM contains data – from a survey
of 1,000 UK businesses – on business
confidence, financial performance,
challenges and expectations. BCM
indicators provide a useful and unique
steer on future developments in the
UK economy.
icaew.com/ukeconomicforecast
5
About Cebr
Centre for Economics and Business Research ltd is an independent consultancy
with a reputation for sound business advice based on thorough and insightful
research. Since 1992, Cebr has been at the forefront of business and public
interest research. They provide analysis, forecasts and strategic advice to
major UK and multinational companies, financial institutions, government
departments and agencies and trade bodies.
For further information about Cebr please visit cebr.com
ICAEW
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chartered accountants around the world. Through our technical knowledge,
skills and expertise, we provide insight and leadership to the global
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Our members provide financial knowledge and guidance based on the
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Because of us, people can do business with confidence.
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© ICAEW 2012 MKTPLN11606 09/12