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UK ECONOMIC FORECAST Q1 2013 BUSINESS WITH confidence icaew.com/ukeconomicforecast 2 icaew.com/ukeconomicforecast 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. 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 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 4 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 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. icaew.com/ukeconomicforecast 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. 5 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. 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 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 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 MKTPLN12144 03/13