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UK ECONOMIC FORECAST
Q1 2013
BUSINESS WITH confidence
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Introduction
Welcome to the third 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 strong 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 a
double-dip recession at the end of 2011. BCM data 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.
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
97.9
2012
.................................................
97
97.7
.................................................
98
99
.................................................
-4.0
99
1.0
.................................................
-5
100
.................................................
-3
-4
-1.0
101
100
.................................................
-1
-2
0.2
Fig. 2 Real GDP – index (2007 = 100)
.................................................
0
0.9
.................................................
1
1.8
.................................................
2
.................................................
3.6
3
.................................................
% 4
.................................................
Fig. 1 Real GDP – annual growth
98.8
2013f
Source: ONS, ICAEW forecasts
The economy showed growth
of just 0.2% in 2012, with
output contracting in three of
the four quarters of the year.
Although likely to be better
than last year, 2013 will be
another year of weak
economic performance, with
GDP growing by just 1.0%
according to the latest ICAEW
economic forecast.
Following an Olympics-boosted
bounce back in Q3, Gross Domestic
Product (GDP) in the UK contracted
at a quarter-on-quarter rate of 0.3%
in Q4 2012, according to the Office
for National Statistics’ (ONS) second
estimate of growth in the quarter.
For 2012 as a whole the economy
showed marginal growth of just 0.2%
and GDP was 2.1% lower than it was
in 2007. Over the five years since the
onset of the financial crisis, economic
output still hasn’t recovered to its
previous peak.
The sector data showed output in the
production industries fell at a quarteron-quarter rate of 1.9% in Q4. Output
in the construction sector increased
by 0.9%, while in the services sector
output was estimated to have declined
by 0.1% compared with Q3 2012.
to growth at the start of 2013, with
business confidence indicators providing
reason for cautious optimism. The latest
ICAEW / Grant Thornton UK Business
Confidence Monitor (BCM) shows that
business confidence has improved
notably in the first quarter of the year.
The Confidence Index now stands at
+12.8, up from +4.2 in Q4 2012. The
latest BCM points to quarter-on-quarter
growth of 0.4% in Q1 2013. Overall, our central forecast is for the
economy to grow by 1.0% this year,
marginally up from our Q4 forecast of
0.8% growth. This pace of expansion
would still leave GDP 1.2% below its
2007 peak however, so the UK still
has a significant way to go before the
economy breaches this important
milestone on the road to recovery.
Despite the economy contracting in Q4
2012, the UK economy should return
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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
1.9
2013f
Source: ONS, ICAEW forecasts
Businesses have revised up their
capital investment expectations.
But this still suggests a more
modest pace of business investment
growth than forecast by the Office
for Budget Responsibility (OBR).
In this quarter’s BCM, businesses
report that capital investment is
expected to increase by 1.6% over the
next 12 months, up from expected
growth of 1.0% in Q4 2012 and the
highest projected rate of investment
growth since Q3 2011. Nevertheless,
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
1.9% in 2013, up from its Q4 forecast
of 0.4% growth and reflecting the
latest pick-up in business investment
expectations. Despite this upward
revision, this still leaves our central
forecast for business investment much
weaker than the OBR’s December
projection of 4.9% growth.
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Growth in company research and
development (R&D) budgets is
expected to remain modest. This
quarter, businesses expect an
expansion in R&D budgets of just
1.2% over the next 12 months,
unchanged from the previous quarter.
However, businesses report that they
expect staff development budgets
to increase by 1.5%, the highest
expected growth since Q1 2008. This
suggests that businesses have become
more willing to spend money on
attracting, retaining and training staff
within their organisations.
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Labour Market
2007
2008
2010
2011
2012
7
6.5
1.4
6
5.5
5.3
5
2013f
2007
5.7
2008
2009
7.8
2010
Source: ONS, ICAEW forecasts
Source: ONS, ICAEW forecasts
Despite the economy
contracting in three out of
four quarters last year the
labour market performed
surprisingly well as rising
private sector employment
reduced the unemployment
rate. However, with more
public sector job shedding on
the way, further declines in
unemployment may be harder
to come by.
The latest UK labour market data
showed the rate of unemployment
in the UK stood at 7.8% for the three
months to December 2012 – down
from 8.4% in the same three months
of 2011. Unemployment declined by
156,000 over this time period. The
more timely claimant count measure
also pointed to a fall in unemployment
– the number of individuals claiming
Job Seekers Allowance was 12,500
lower in January than recorded in
December. The latest data offer an
encouraging sign of resilience in the
UK labour market despite ongoing
economic frailty.
However, these labour market gains
are unlikely to continue in 2013,
according to our latest economic
forecasts. Although businesses in
this quarter’s BCM expect employee
headcount to grow by 1.5% over the
next 12 months, public sector job
shedding will partially offset some
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
8.0
2013f
of these labour market gains; the
OBR expects general government
employment to decline by 1.9%
between 2012/13 and 2013/14. Given
this, we expect the unemployment
rate to rise slightly from the 7.8%
seen in the latest data – with the rate
averaging 8.0% in 2013.
Furthermore, BCM suggests that pay
growth will remain very weak this year,
with businesses continuing to report
that they intend to increase employee
pay packets at a much more modest
rate than before the financial crisis. We
expect average total earnings for the
whole economy to grow by just 1.4%
this year, far below the 2001–2007
average of 4.3%. While businesses
have taken on more staff over the past
year – private sector employment has
reached an all-time high – firms have
been controlling costs through wage
restraint.
icaew.com/ukeconomicforecast
Forecasting methodology
Headline economic forecasts
2007
2008
2009
2010
2011
2012
2013f
+3.6%
-1.0%
-4.0%
+1.8%
+0.9%
+0.2%
+1.0%
+10.9%
-0.2%
-14.4%
-0.4%
3.1%
+4.9%
+1.9%
2007
2008
2009
2010
2011
2012
2013f
Earnings (total pay) – annual growth
+4.7%
+3.8%
+0.0%
+2.3%
+2.4%
+1.3%
+1.4%
Employment – annual growth
+0.7%
+0.7%
-1.6%
+0.2%
+0.5%
+1.2%
+0.9%
5.3%
5.7%
7.7%
7.8%
8.1%
7.9%
8.0%
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.
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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
About ICAEW
ICAEW is a professional membership organisation, supporting over 140,000
chartered accountants around the world. Through our technical knowledge,
skills and expertise, we provide insight and leadership to the global
accountancy and finance profession.
Our members provide financial knowledge and guidance based on the
highest professional, technical and ethical standards. We develop and
support individuals, organisations and communities to help them achieve
long-term, sustainable economic value.
Because of us, people can do business with confidence.
ICAEW
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E [email protected]
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