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UK ECONOMIC FORECAST Q2 2013 BUSINESS WITH confidence icaew.com/ukeconomicforecast 2 icaew.com/ukeconomicforecast 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. icaew.com 3 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. icaew.com/ukeconomicforecast 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. www.charteredaccountantsworldwide.com www.globalaccountingalliance.com ICAEW Chartered Accountants’ Hall Moorgate Place London EC2R 6EA UK T +44 (0)20 7920 8705 E [email protected] icaew.com/ukeconomicforecast linkedin.com – find ICAEW twitter.com/icaew facebook.com/icaew © ICAEW 2013 MKTPLN12326 06/13