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UK ECONOMIC FORECAST
Q2 2013
BUSINESS WITH confidence
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Introduction
Welcome to the fourth 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).
Since its launch in 2004, the BCM has provided a reliable steer on the overall
direction of travel in the economy. It pointed to the weakening real economic
environment at the end of 2007 and into 2008 and indicated the return to
growth in the third quarter of 2009. It also correctly predicted the UK entering
an economic downturn at the end of 2011. In addition, BCM data include a
range of business performance and planning indicators that build up a picture
of how different businesses are faring and how the economy is likely to evolve in
the coming months.
This was demonstrated by analysis published in 2011 by Cebr, ICAEW’s
economic consultants, which concluded that the BCM dataset has tracked a
wide range of key economic indicators remarkably well in recent years.
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ECONOMIC OUTLOOK
2007
2008
2009
2010
2011
2012
96
95
94
93
92
2013f
2007
2008
95.1
2009
96.8
2010
2011
98.0
2012
.................................................
97
97.8
.................................................
98
.................................................
-4.0
99
99
.................................................
-5
1.2
100
.................................................
-3
-4
-1.0
101
100
.................................................
-1
-2
0.3
Fig. 2 Real GDP – index (2007 = 100)
.................................................
0
1.0
.................................................
1
1.8
.................................................
2
.................................................
3.6
3
.................................................
% 4
.................................................
Fig. 1 Real GDP – annual growth
99.2
2013f
Source: ONS, ICAEW forecasts
The latest economic and
business confidence data
show the UK economic
recovery has gained
momentum at the start of
2013. As forecast by the
ICAEW/Grant Thornton Business
Confidence Monitor (BCM), the
economy avoided a triple-dip
recession at the start of the
year, which leaves the UK
well-placed to achieve growth
of over 1% in 2013.
UK Gross Domestic Product grew at
a quarter-on-quarter rate of 0.3%
in Q1 2013, according to the Office
for National Statistics’ (ONS) second
estimate of growth in the quarter. This
outcome was broadly in line with that
forecast in the Q1 2013 BCM.
The Q2 2013 BCM shows that
business confidence has continued to
improve in the second quarter of the
year, with confidence now standing at
its highest level since Q3 2010. The
Confidence Index stands at +16.7, up
from +12.8 in Q1 2013 and +4.2 in
the last quarter of 2012.
The improving business outlook
means ICAEW’s central forecast is for
the economy to grow by 1.2% this
year, up from its Q1 forecast of 1.0%
growth. Under this forecast, the UK
economy will see its strongest pace
of expansion since 2010. However,
GDP would still be 0.8% below its
4
2007 peak level, though it is highly
likely that this peak will be exceeded
in 2014 if the economic recovery
continues at a reasonable pace.
The main risk to achieving this is still
continued economic weakness in the
eurozone, where GDP contracted
for a sixth consecutive quarter in
Q1 2013. UK exports of goods and
services contracted at a quarter-onquarter rate of 0.8% in Q1 2013,
mainly reflecting recession in the
single currency area. Fiscal austerity
will also curb the pace of economic
growth for some time, with the deficit
likely to remain high even by the time
of the next election; the Office for
Budget Responsibility estimates that
public sector net borrowing will stand
at £97bn in the 2014/15 fiscal year.
Deficit reduction will be at least a twoParliament problem, continuing for
several years beyond the next election.
icaew.com/ukeconomicforecast
Business Investment
-10
-15
-20
2007
-0.2
2008
-14.4
2009
-0.4
2010
2011
4.9
2012
.................................................
-5
3.1
.................................................
0
.................................................
5
.................................................
10.9
10
.................................................
% 15
.................................................
Fig. 3 Business investment – annual growth
2.5
2013f
Source: ONS, ICAEW forecasts
Business investment intentions
remain modest and investment
growth looks set to slow
compared with 2012.
In this quarter’s BCM, businesses
report that capital investment is
expected to increase by 1.7% over the
next 12 months, broadly unchanged
from Q1 2013. Businesses still expect
investment growth to slow compared
with the previous 12 months – they
report that capital investment rose by
2.0% over this period.
ICAEW’s latest forecast is for total
real business investment to grow by
2.5% in 2013, up from its Q1 forecast
of 1.9% growth and reflecting a
continued improvement in business
confidence this year. However, this
pace of investment growth is almost
half the 4.9% seen in 2012 and also
below the 3.1% growth achieved
in 2011.
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In 2012, real terms business
investment stood 8.1% below its
2007 peak level, despite the relatively
robust growth seen over the past
couple of years. Even with 2.5%
growth this year, business investment
would still be 5.8% below this
peak level. Overall, the investment
picture remains subdued and ICAEW
survey data suggest that, despite
an improving economic outlook,
businesses remain cautious about
committing to a sustained expansion
in capital spending. The fragility of
investment-driven growth is also
supported by ONS data, which show
that business investment fell by 0.4%
between Q4 2012 and Q1 2013,
the second consecutive quarter of
declining investment.
5
Labour Market
2007
2008
2010
2011
2012
7
6.5
1.5
6
5.5
5.3
5
2013f
2007
5.7
2008
2009
7.8
2010
Source: ONS, ICAEW forecasts
Source: ONS, ICAEW forecasts
Earnings growth is set to be
extremely weak this year,
resulting in another decline in
real incomes. Unemployment
is also set to rise despite an
improvement in economic
growth prospects.
The latest UK labour market data
showed the rate of unemployment
in the UK stood at 7.8% for the three
months to March 2013 – up 0.1
percentage points on the last three
months of 2012. The number of
unemployed individuals rose slightly,
by 15,000, over this time period.
Overall, the labour market is likely
to be flat at best in 2013, as public
sector job shedding places downward
pressure on employment. While
private sector employment reached
a record high last year as companies
hired staff despite the weak economic
backdrop, strong employment
growth is unlikely to be repeated in
2013. In particular, firms appear to
be moving some part-time staff into
full-time roles rather than hiring new
staff. For the three months to March,
full-time employment rose by 10,000
compared with the previous quarter
6
8.1
2011
7.9
2012
...........................................
7.5
7.7
...........................................
8
...........................................
0.0
2009
9
8.5
...........................................
0
1.3
%
...........................................
1
2.4
Fig. 5 Unemployment Rate, %
...........................................
2
2.3
...........................................
3
3.8
...........................................
4
...........................................
4.7
...........................................
5
...........................................
% 6
...........................................
Fig. 4 Average earnings – annual growth
8.1
2013f
while part-time employment declined
by 53,000. Given this, ICAEW expects
the unemployment rate to rise slightly
from the 7.8% seen in the latest data –
with the rate averaging 8.1% in 2013.
The biggest source of concern
in the UK labour market remains
exceptionally weak earnings growth,
which reached extremely low levels at
the start of 2013. ONS data showed
annual growth in average total pay,
for the three months to March 2013,
fell to its lowest level since the three
months to May 2009. ICAEW expects
total pay growth of just 1.5% for
2013 as a whole. With consumer price
inflation remaining above the Bank
of England’s central target of 2.0%,
employees will continue to see their
earnings decline in real terms, which
will hold back the ability of consumer
spending to drive growth significantly
in the short term.
icaew.com/ukeconomicforecast
Forecasting methodology
Headline economic forecasts
2007
2008
2009
2010
2011
2012
2013f
+3.6%
-1.0%
-4.0%
+1.8%
+1.0%
+0.3%
+1.2%
+10.9%
-0.2%
-14.4%
-0.4%
3.1%
+4.9%
+2.5%
2007
2008
2009
2010
2011
2012
2013f
Earnings (total pay) – annual growth
+4.7%
+3.8%
+0.0%
+2.3%
+2.4%
+1.3%
+1.5%
Employment – annual growth
+0.7%
+0.7%
-1.6%
+0.2%
+0.5%
+1.2%
+0.7%
5.3%
5.7%
7.7%
7.8%
8.1%
7.9%
8.1%
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 correlation 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
7
About Cebr
Centre for Economics and Business Research 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 www.cebr.com
ICAEW is a world leading professional membership organisation that promotes, develops and supports
over 140,000 chartered accountants worldwide. We provide qualifications and professional development,
share our knowledge, insight and technical expertise, and protect the quality and integrity of the
accountancy and finance profession.
As leaders in accountancy, finance and business our members have the knowledge, skills and commitment
to maintain the highest professional standards and integrity. Together we contribute to the success of
individuals, organisations, communities and economies around the world.
Because of us, people can do business with confidence.
ICAEW is a founder member of Chartered Accountants Worldwide and the Global Accounting Alliance.
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© ICAEW 2013 MKTPLN12326 06/13