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UK ECONOMIC FORECAST
Q4 2012
BUSINESS WITH confidence
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Introduction
Welcome to the second 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, 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
2012f
96
95
94
93
92
2013f
2007
2008
95.1
2009
96.8
2010
2011
97.7
2012f
.................................................
97
97.7
.................................................
98
99
.................................................
-4.0
99
0.8
.................................................
-5
100
.................................................
-3
-4
-1.0
101
100
.................................................
-1
-2
0.0
Fig. 2 Real GDP – index (2007 = 100)
.................................................
0
0.9
.................................................
1
1.8
.................................................
2
.................................................
3.6
3
.................................................
% 4
.................................................
Fig. 1 Real GDP – annual growth
98.4
2013f
Source: ONS, ICAEW forecasts
Despite an Olympic bounce in
the latest growth figures, the
economy is set to show zero
growth in 2012 and very
modest growth in 2013.
While the labour market has
fared better than expected to
date, the cost of lower
unemployment is likely to be
weak earnings growth.
The economy is set to record
zero growth for 2012 as a
whole and looks likely to
show only very weak growth
next year – we are forecasting
growth of just 0.8% in 2013.
This leaves GDP still some
1.6% below its pre-crisis peak.
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The latest data on UK economic
growth was better than expected
– the Office for National Statistics’
(ONS) second estimate of economic
activity in Q3 2012 showed that the
economy grew by 1.0% compared
with the previous quarter. This is the
strongest growth seen since Q3 2007
– the quarter in which the Northern
Rock bank crisis occurred.
However, these seemingly robust
growth figures come with a couple
of significant caveats. Firstly, the
Olympic Games, particularly ticket
sales, provided a boost to the
economy in the third quarter of the
year. Secondly, the presence of an
extra Bank Holiday in Q2 2012 means
that the Q3 figures are compared
against a quarter in which economic
output was unusually suppressed.
Consequently, underlying economic
growth, driven by fundamentals,
is likely to be much less than 1.0%.
BCM leading indicators support
this assessment of a weaker, more
tentative recovery. The BCM
Confidence Index stands at +4.2 this
quarter, slightly up from +1.1 last
quarter. This increase in business
confidence is not statistically
significant, and points to modest
quarter-on-quarter growth of 0.2%
in Q4 2012. This would imply zero
growth for 2012 as a whole.
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Business Investment
-10
-15
-20
2007
2008
-14.4
2009
-0.4
2010
2011
2.8
2012f
.................................................
-5
-0.2
2.9
.................................................
0
.................................................
5
.................................................
10.9
10
.................................................
% 15
.................................................
Fig. 3 Business investment – annual growth
0.4
2013f
Source: ONS, ICAEW forecasts
An investment-led recovery
remains a remote possibility in
the short term, with the Office
for Budget Responsibility
(OBR)’s December forecasts
looking very optimistic.
In this quarter’s BCM, businesses
report capital investment rising
by 1.8% compared with the
same quarter a year ago, broadly
unchanged from growth rates seen in
previous quarters of 2012. However,
capital investment is expected to be
just 1.0% higher than a year ago in
Q4 2013.
Our latest forecast is for total real
business investment growth to slow
from 2.8% this year to 0.4% for 2013
as a whole. This is much weaker
than the 4.9% growth predicted
in the OBR’s December Economic
and Fiscal Outlook publication but
up from our previous forecast of a
0.9% contraction, reflecting a slight
improvement in business confidence
this quarter.
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Growth in company research and
development budgets is expected
to remain very modest. This quarter,
businesses report that their research
and development budgets are 2.3%
higher than 12 months ago, but they
expect an expansion of just 1.2%
over the next 12 months. Overall,
this suggests that businesses remain
concerned about the medium-term
economic outlook for the UK and are
thus reluctant to expand investment
on a large scale.
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Labour Market
2007
2008
0.0
2009
2010
2011
1.8
2012f
7.5
7
2.0
6.5
6
5.5
5.3
5
2013f
2007
5.7
2008
7.7
2009
7.8
2010
Source: ONS, ICAEW forecasts
Source: ONS, ICAEW forecasts
The labour market has defied
economic gravity in recent
months. But the cost of lower
unemployment seems to be
weak wage growth.
Despite the UK economy
contracting in the first half of 2012,
unemployment was lower in Q3 2012
than at the start of the year. The
unemployment rate fell from 8.2%
in Q1 2012 to 7.8% in Q3 2012 –
a decline of 96,000 in the number of
individuals out of work.
The number of people in employment
rose by 100,000 over the three
months to September, compared with
the previous three months. However,
part-time employment accounted
for just under half (49.0%) of this
increase – underemployment remains
an ongoing issue.
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 0.9% on average over the
next 12 months. Public sector job
6
8.1
2011
8.0
2012f
...........................................
0
2.4
8
...........................................
1
2.3
.................................
2
.................................
3
3.8
.................................
4
.................................
4.7
.................................
5
.................................
% 6
...........................................
9
8.5
...........................................
%
...........................................
Fig. 5 Unemployment Rate, %
...........................................
Fig. 4 Average earnings – annual growth
7.8
2013f
cuts will hold back the labour market
over the coming years. Given this,
we expect employment growth to
slow from 1.1% this year to 0.8%
in 2013. The unemployment rate is
expected to average 7.8% next year.
Compared with last quarter, we have
revised down our forecast of the
unemployment rate in 2013 to reflect
the latest labour market data, which
suggests that businesses have created
jobs at a faster rate than economic
fundamentals would traditionally
suggest.
Rather than shedding staff, businesses
seem to be controlling costs by
curbing employee wage growth. We
expect total pay growth for the whole
economy to stand at just 2.0% in
2013 – less than half the 2000–2007
average annual growth rate of 4.3%.
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Forecasting methodology
Headline economic forecasts
2007
2008
2009
2010
2011
2012f
2013f
+3.6%
-1.0%
-4.0%
+1.8%
+0.9%
-0.0%
+0.8%
+10.9%
-0.2%
-14.4%
-0.4%
+2.9%
+2.8%
+0.4%
2007
2008
2009
2010
2011
2012f
2013f
Earnings (total pay) – annual growth
+4.7%
+3.8%
+0.0%
+2.3%
+2.4%
+1.8%
+2.0%
Employment – annual growth
+0.7%
+0.7%
-1.6%
+0.2%
+0.5%
+1.1%
+0.8%
5.3%
5.7%
7.7%
7.8%
8.1%
8.0%
7.8%
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 cebr.com
ICAEW
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chartered accountants around the world. Through our technical knowledge,
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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 MKTPLN11798 12/12