Download Uk Economic Forecast Q1 2014 BUSINESS WITH CONFIDENCE icaew.com/ukeconomicforecast

Uk Economic Forecast
Q1 2014
BUSINESS WITH confidence
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2
Introduction
Welcome to the seventh edition of the ICAEW Economic Forecast, based on the views of
the people running UK PLC; ICAEW Chartered Accountants working in businesses of all
types, across every economic sector and across all regions of the UK, surveyed through
the quarterly ICAEW/Grant Thornton UK Business Confidence Monitor (BCM).
In this latest edition, we have revised up our 2014 economic growth forecast from 2.9%
to 3.3%, as business confidence hit a new record high in this quarter’s BCM. Confidence
has now been increasing for six consecutive quarters – a sustained and significant period
of rising business prospects.
Overall, the UK economy should see some rebalancing of growth this year, with business
investment making a relatively strong contribution to economic expansion and helping
reduce the focus of growth on consumer spending. ICAEW expects real business
investment to grow by 7.1% this year, the fastest pace of expansion since 2007.
Trade remains a significant concern in the current recovery, however, with this quarter’s
BCM suggesting that the UK’s already poor trade position could worsen further this year.
Despite the rise in business confidence this quarter, export growth has failed to pick up in
the latest BCM. With import growth likely to accelerate amid rising consumer spending
and business investment, the trade deficit could widen as the UK imports more than it
exports. This will bear down on the pace of expansion in the short term.
The labour market is expected to continue its rapid improvement in 2014, with the
unemployment rate averaging 6.6%, down from 7.6% last year. Earnings growth is
expected to increase from 1.3% in 2013 to 2.0% this year, though this is still very weak
compared with typical pre-financial crisis levels. Having said that, recent declines in
inflation mean that this year should see earnings at least keeping pace with price growth,
easing some financial pressures on UK households.
The rapid fall in unemployment, much faster than anticipated by the Bank of England,
has led to a rewrite of the Bank’s policy of forward guidance on the future path of interest
rates. As of February, the Bank will now look at a broad range of labour market indicators
to measure the amount of slack in the economy. The extent of this slack – which the
Bank estimates amounts to 1.0–1.5% of GDP – will be used to inform the future path of
interest rates.
Broader labour market indicators point to significant slack in the economy even
though unemployment has fallen, with a near-record high share of part-time workers
working part time because they cannot find suitable full-time work. BCM measures
of spare capacity also show that many businesses – particularly in the Production and
Construction sectors – are operating below capacity, suggesting that an immediate Bank
Rate rise remains unwarranted.
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3
Economic outlook
Fig. 1 Real GDP – annual growth
% 4
Fig. 2 Real GDP – index (2007 = 100)
3.4
3.3
3
1.7
2
1
100
0.3
0
102.0
102
1.8
1.1
104
100
99.2
98.7
98
-1
-0.8
-3
2012
94.1
94
-4
2011
95.7
96
-2
96.7
97.0
92
-5
-5.2
-6
2007
2008
2009
90
2010
2011
2012
2013
2014f
2007
2008
2009
2010
2013
2014f
Source: ONS, ICAEW forecasts
The UK economy is expected to
grow by 3.3% this year – the
fastest pace of expansion since
2007 and up from our Q4 2013
forecast of 2.9% growth.
Gross Domestic Product (GDP) in
the UK grew at a quarter-on-quarter
rate of 0.7% in Q4 2013, according
to the Office for National Statistics’
second estimate of growth in the
quarter. For the year as a whole, the
economy expanded by 1.8% – the
fastest pace since the financial crisis.
ICAEW expects economic growth to
accelerate further this year, with GDP
rising by 3.3% in 2014. This is up
from our previous forecast of 2.9%
and broadly in line with the Bank of
England’s central forecast presented in
its February Inflation Report.
This upward revision to our growth
forecasts reflects a continued rise
in business confidence. The BCM
Confidence Index stands at +37.2
this quarter, surpassing Q4 2013’s
+31.7 to stand at a new all-time high.
Confidence has increased for six
consecutive quarters, suggesting that
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the economic recovery has gained
significant momentum.
This year, ICAEW expects the UK
economy to rebalance successfully
in some respects, but not others.
Investment is likely to expand
relatively strongly in 2014 as
businesses increase capital spending.
This will support economic growth
alongside consumer spending, which
was by far the largest driver of growth
last year. In addition, the Construction
sector should see rapid expansion
this year and return closer to typical
pre-crisis levels of output. Businesses
in this sector report record-high
confidence this quarter; it stands
much higher than in the Production
and Services sectors.
Despite the rise in business confidence
this quarter, export growth has failed
to pick up in the latest BCM and this
4
Economic outlook (continued)
is where some concerns about the
economic recovery lie. The UK has
been running an annual trade deficit
– importing more than exporting –
since 1997, and this is weighing on
growth prospects. In this quarter’s
BCM, businesses expect exports
to grow by 3.9% over the next 12
months, down from predicted growth
of 4.4% in Q4 2013. Lacklustre export
growth, combined with rising imports
as consumer spending and business
investment grow, mean that the
trade deficit is likely to widen this year.
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One threat to the UK’s economic
prospects comes from Russia’s actions
in the Crimean peninsula, which
may provoke the implementation of
trade sanctions affecting the price of
energy and wheat exports from the
region. Although the chances of such
sanctions being imposed are relatively
low, the impact of uncertainty
created by disruption in the political
environment presents a risk to growth
outlook.
5
Business investment
Fig. 3 REAL Business investment – annual growth
% 15
13.7
10
7.1
4.0
5
3.9
1.7
0
-1.2
-1.3
-5
-10
-15
-15.2
-20
2007
2008
2009
2010
2011
2012
2013
2014f
Source: ONS, ICAEW forecasts
ICAEW’s business investment
forecast has been revised up as
companies have become more
confident. ICAEW expects real
business investment growth of
7.1% this year.
The latest capital investment figures in
BCM show growth in capital spending
picked up as companies became more
confident in the economic outlook.
Businesses report the fastest expected
capital investment growth since Q3
2007. Overall, ICAEW expects real
business investment to grow relatively
strongly, by 7.1%, this year. This is
more optimistic than the Office for
Budget Responsibility (OBR) December
forecast of 5.1% growth in 2014.
In recent quarters, reported
investment growth among businesses
has generally surpassed projections
from a year earlier, pointing to an
improving investment environment.
While businesses have been relatively
cautious in their investment plans,
accelerating economic growth appears
to have led many of them to ramp up
investment by more than expected.
Nevertheless, corporate cash reserves
remain high, at about £500bn
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according to the latest estimates,
suggesting that businesses on the
whole are relatively cautious about
investing their cash. The government
may need to do more to assure
businesses about the sustainability of
the current recovery, to encourage
conversion of these cash reserves into
investment.
There is a mixed picture for capital
investment at an industry sector
level. Capital investment growth
plans for the coming 12 months
are broadly unchanged for the
Production industries compared with
Q1 2013, while they have increased
in the Construction and Services
sectors. Overall, though, ICAEW’s
latest forecasts suggest that business
investment should make a notable
contribution to growth this year,
helping to ensure that the economy is
not too reliant on consumer spending
to drive things forward.
6
Labour market
Fig. 4 Average earnings – annual growth
%
% 6
5
Fig. 5 Unemployment Rate, %
9
8.5
4.9
8
4
3
2.3
1.3
1.3
2.0
1
7.9
7.6
0.0
2009
6.6
6.5
6
5.5
2008
8.1
7
2.4
2
2007
7.8
7.5
3.5
0
7.7
5.7
5.3
5
2010
2011
2012
2013
2014f
2007
2008
2009
2010
2011
Source: ONS, ICAEW forecasts
Source: ONS, ICAEW forecasts
The unemployment rate has
fallen rapidly, causing the Bank
of England to rewrite its policy
of forward guidance. ICAEW
expects the unemployment
rate to average 6.6% this year,
down from 7.6% in 2013.
Although pay growth is
expected to pick up in 2014, it
will remain low by pre-financial
crisis standards.
The UK labour market has rapidly
improved in recent quarters. In Q4
2013, the unemployment rate stood
at 7.2%, 0.4 percentage points lower
than in the previous quarter and close
to the 7.0% mark at which the Bank of
England’s Monetary Policy Committee
(MPC) would have started to consider
raising the Bank Rate under its August
2013 policy of forward guidance. An
acceleration in economic growth this
year means that unemployment is
likely to fall further; ICAEW expects the
unemployment rate to average 6.6%
this year, the lowest since 2008.
The rapid fall in unemployment
is faster than the Bank of England
anticipated so it has rewritten its
August policy of forward guidance on
the future path of interest rates. The
Bank will now look at a broad range
of labour market indicators, such as
underemployment (the number of
icaew.com/ukeconomicforecast
2012
2013
2014f
part-time individuals who would like
to work full time), to measure the
amount of slack in the economy.
The extent of this slack will be used
to inform the future path of interest
rates.
Despite rapidly declining
unemployment, earnings growth
remains subdued according to the
latest data, though this is expected
to improve in 2014. ICAEW expects
average employee earnings growth to
increase to 2.0% this year, reflecting
rising bonus payments and a pick-up
in regular salary growth in line with
the improving economic environment.
However, this growth is less than half
the average of 4.3% seen between
2001 and 2007.
7
Focus on: spare capacity – when will interest rates rise?
Fig. 6 % of businesses operating below,
at and above capacity
Fig. 7 % of part-time workers who are working
part time because they can’t find full-time work
% 70
60
50
Below
capacity
40
At
capacity
30
20
10
0
Above
capacity
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
% 20
18
16
14
12
10
8
6
4
2
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: ICAEW/Grant Thornton Business Confidence Monitor, ONS, OBR forecasts for household debt
The Bank of England’s new
forward guidance on interest
rates will take account of a
broad range of indicators,
including the amount of
slack in the UK economy.
ICAEW’s indicators show
that slack remains significant
– particularly in the
Production and Construction
sectors – though there are
signs of more businesses
operating at capacity.
In its February Inflation Report, the
Bank of England provided new
forward guidance on when it will
consider raising interest rates. In
the report, it was revealed that the
Monetary Policy Committee (MPC)
has decided to loosen the dependence
of a Bank Rate change on the
unemployment rate reaching 7.0%.
Last August, the Bank announced that
it would consider raising rates when
unemployment fell to this level, but
the faster-than-expected improvement
in the labour market last year has
led the Bank to revise the August
guidance.
Given that the unemployment
threshold is likely to be reached within
the next few months the MPC has
now committed to looking at a broad
range of labour market indicators, in
addition to unemployment, to inform
the future path of interest rates. In
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particular, the MPC estimates that
there is a great deal of spare capacity
within the economy, amounting to
1.0%-1.5% of GDP, and that much
of this is concentrated in the labour
market. Based on this indicator,
there is no need for an immediate
tightening of monetary policy.
Many labour market indicators
highlight significant slack remaining
in the economy. For example, on the
latest data nearly one fifth (18.1%)
of part-time workers are working
part time because they cannot find
full-time employment – a near-record
high share.
ICAEW’s indicators, included in the
quarterly BCM report, also confirm
that spare capacity remains a
feature of the economy. Over half of
businesses (53%) report operating
below capacity this quarter, though
8
Focus on: spare capacity – when will interest rates rise? (continued)
this is down from the high of 62%
seen in Q4 2012. Although the share
of businesses operating below capacity
has been on a trend downward path
in recent quarters, as the economy
has strengthened, it remains relatively
high. This suggests that there is no
need for an immediate rise in interest
rates.
Spare capacity is more of an issue
in some sectors than others, with
businesses in the Construction and
Production sectors more likely to be
operating below capacity than their
counterparts in the Services sector.
Over three fifths of companies in the
Construction and Manufacturing &
Engineering sectors are operating
below capacity this quarter, at 63%
and 69% respectively, a figure which
falls to 50% for Services firms. The
variations in spare capacity have led
to markedly different labour market
trends in different sectors. Between
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2007 and 2013, the number of
workforce jobs in the Manufacturing
and Construction sectors fell by 14.0%
and 11.3% respectively, according to
ONS data, while jobs in the Services
sector rose by 3.3%.
The loosening of forward guidance to
a broader-based indicator approach
will ease the pressure on the MPC to
raise the Bank Rate over the coming
months, as many indicators still show
significant slack in the economy.
ICAEW’s data show that spare capacity
remains substantial across much of
the economy, though the extent of
this spare capacity should decline
sharply this year as economic growth
accelerates – paving the way for a
possible rate rise in early 2015. Even
when interest rates do rise, however,
the pace of these rises is likely to be
very gradual, to prevent a derailment
of the current recovery.
9
Forecasting methodology
Headline economic forecasts
2007
2008
2009
2010
2011
2012
2013
2014f
+3.4%
-0.8%
-5.2%
+1.7%
+1.1%
+0.3%
+1.8%
+3.3%
+13.7%
+4.0%
-15.2%
+1.7%
-1.3%
+3.9%
-1.2%
+7.1%
2007
2008
2009
2010
2011
2012
2013
2014f
Earnings (total pay) – annual growth
+4.9%
+3.5%
+0.0%
+2.3%
+2.4%
+1.3%
+1.3%
+2.0%
Employment – annual growth
+0.7%
+0.7%
-1.6%
+0.2%
+0.5%
+1.2%
+1.3%
+1.4%
5.3%
5.7%
7.7%
7.8%
8.1%
7.9%
7.6%
6.6%
Real GDP – annual growth
Real 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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10
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