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UK ECONOMIC FORECAST Q4 2013 BUSINESS WITH confidence icaew.com/ukeconomicforecast 2 icaew.com/ukeconomicforecast Introduction Welcome to the sixth 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 2.3% in Q3 2013 to 2.9% this quarter. This robust rate of economic expansion will be supported by the rise in consumer and business confidence seen throughout 2013, feeding through into growth in consumer spending and business investment. The BCM shows business confidence at its highest level on record this quarter. It has increased for five consecutive quarters – the longest period of rising confidence on record – suggesting some degree of resilience in the current economic recovery. While there are still some concerns about the sustainability of the recovery – deep government spending cuts continue to loom further down the road – fears have abated somewhat. The latest BCM shows businesses more willing to invest over the coming year, and expected export growth has also picked up. Taken together, this will enable growth to be less heavily driven by consumer spending than it was in 2013. Although the UK’s track record on investment remains weak compared with many other developed world economies, there are tentative signs that the trajectory of investment is moving in the right direction. The Chancellor should explore ways of supporting investment in December’s Autumn Statement and next year’s Budget through measures such as timelimited tax incentives and a business investment counterpart to Help to Buy, using the government balance sheet to unlock investment. A continued improvement in the labour market is expected next year, with ongoing pay restraint allowing for a robust pace of job creation. Our latest economic forecasts suggest that the unemployment rate is likely to reach 7.0% – the threshold at which the Bank of England’s Monetary Policy Committee will consider raising interest rates – in early 2015 or possibly even late 2014. This compares with our previous forecast which suggested that the 7.0% threshold would not be reached until 2016. Consequently, unless the Bank of England announces a new threshold determining when interest rates will rise, a tightening of monetary policy is now likely to occur earlier than initially anticipated. A rate rise could be warranted around the time of the next general election. icaew.com/ukeconomicforecast icaew.com 3 ECONOMIC OUTLOOK Fig. 1 Real GDP – annual growth % 4 Fig. 2 Real GDP – index (2007 = 100) 3.4 2.9 3 1.7 2 1 1.6 1.1 -1 101 100 0.1 0 102 97 -3 96 -4 95 2008 2009 2010 2011 2012 2013f 2014f 96.7 96.8 2011 2012 95.6 94.0 94 -5.2 2007 98.3 98 -2 -6 99.2 99 -0.8 -5 101.2 100 93 2007 2008 2009 2010 2013f 2014f Source: ONS, ICAEW forecasts The UK economy is expected to grow at its fastest rate since the financial crisis in 2014, with growth of just under 3%. This is sharply up from the growth of 1.6% expected this year and suggests that the UK will be one of the fastest growing major economies in the developed world in 2014 (if not the fastest). Gross Domestic Product (GDP) in the UK grew at a quarter-on-quarter rate of 0.8% in Q3 2013, according to the Office for National Statistics’ second estimate of growth in the quarter. ICAEW predicts that, this year, the UK economy is set to grow at its fastest rate since 2010, with growth of 1.6% for the year as a whole. This is slightly up from our Q3 2013 forecast of a 1.5% expansion. ICAEW has also made a sharp upward revision to its 2014 growth forecast – from 2.3% in Q3 2013 to 2.9% this quarter. The UK looks set to be one of the fastest growing major economies in the developed world next year. Growth of 2.9% in 2014 would exceed the International Monetary Fund’s forecasts for the US (2.6%), Japan (1.2%), France (1.0%) and Germany (1.4%), for example. The upward revisions to our growth forecasts reflect continued and 4 sustained rises in business confidence, as measured by the ICAEW/Grant Thornton Business Confidence Monitor (BCM). The BCM Confidence Index stands at +31.7 this quarter – up from +24.0 in Q3 2013 and a record high. Confidence has now increased for five consecutive quarters – the most sustained period of rising confidence on record – suggesting resilience to the current recovery above and beyond the ‘false dawn’ return to growth seen in 2010, when relatively solid expansion was followed by the economy floundering throughout 2011 and 2012. Overall, there are signs that conditions are improving and the economic recovery is becoming more broadbased. Business confidence has been increasing across all three main broad industry sectors in BCM – Construction, Production Industries and Services. icaew.com/ukeconomicforecast Business Investment Fig. 3 REAL Business investment – annual growth % 15 13.7 10 5.5 4.0 5 2.6 1.7 0 -1.3 -5 -5.2 -10 -15 -20 -15.2 2007 2008 2009 2010 2011 2012 2013f 2014f Source: ONS, ICAEW forecasts For the first time since 2011, businesses expect investment growth over the next 12 months to be higher than in the previous 12 months, pointing to a recovery in investment next year. In this quarter’s BCM, businesses report that capital investment is expected to increase by 2.2% over the next 12 months, up from the 1.6% growth expected in Q3 2013. Further, for the first time since 2011, firms report that they expect capital investment to grow faster over the next 12 months than over the previous 12 months. ICAEW’s latest forecast is for total real business investment to decline by 5.2% in 2013. The latest BCM data – with rising confidence and capital spending intentions – point to a 5.5% expansion in business investment in 2014, the strongest annual growth seen since 2007. This encouraging turnaround in business investment will support economic growth in 2014, though investment remains an area where the UK economy is underperforming icaew.com/ukeconomicforecast relative to many other countries. Data from the International Monetary Fund show that investment as a share of GDP in the UK (an estimated 14.0% in 2013) is much lower than in the US (19.4%) and the eurozone (17.9%), and indeed the average for advanced economies (19.7%). While capital spending in the UK is showing signs of picking up, the economy is less investment-oriented than in many other developed countries. In the long run, this could hold back labour productivity and consequently real wages. A risk to the investment outlook comes from the level of spare capacity still remaining in the economy, as BCM data show more than half of UK businesses (55%) report running below capacity in Q4 2013, suggesting businesses could make better use of existing resources before investing. 5 Labour Market Fig. 4 Average earnings – annual growth % % 6 5 Fig. 5 Unemployment Rate, % 4.7 8 3.8 4 9 8.5 2.3 2.4 1.3 1 1.7 7.6 1.1 0.0 2009 7.2 6 5.7 5.3 5 2010 2011 2012 2013f 2014f 2007 2008 2009 2010 2011 Source: ONS, ICAEW forecasts Source: ONS, ICAEW forecasts The unemployment rate looks set to fall to 7.0% – the threshold at which the Bank of England will consider raising interest rates – sooner than expected. This could lead to a change to the content of the Bank’s policy of forward guidance or a more rapid tightening of monetary policy than previously expected. The latest UK labour market data showed unemployment down on last year. The unemployment rate stood at 7.6% over the three months to September, down from 7.8% over the same three months a year ago, bringing the headline rate of unemployment closer to the 7.0% rate which would prompt the Bank of England to consider raising the base rate of interest under its policy of forward guidance. ICAEW’s latest forecast is for the unemployment rate to average 7.2% in 2014, down from our previous forecast of 7.6%, reflecting continued improvement in the economic environment. The latest BCM data show that businesses expect staff headcount to grow at its fastest rate since the financial crisis over the next 12 months, and ICAEW’s latest labour market forecasts suggest that the 7.0% unemployment rate threshold is likely to be reached in late 2014 or early 2015. 6 7.9 6.5 5.5 2008 8.1 7 2 2007 7.8 7.5 3 0 7.7 2012 2013f 2014f In its November Inflation Report, the Bank of England’s Monetary Policy Committee (MPC) attached a twoin-five chance to the unemployment rate reaching 7.0% by the end of 2014 and a three-in-five chance to it reaching this threshold by the end of 2015. Given the improving labour market picture, an interest rate hike before 2016 looks increasingly likely under the current policy of forward guidance, leaving the MPC with two choices to make. Firstly, it can keep forward guidance rules the same, suggesting that interest rates are likely to be raised sooner than 2016 – possibly as early as late 2014. Alternatively, the MPC can make a further commitment to keeping rates on hold for longer, changing the threshold at which they will reconsider current policy. icaew.com/ukeconomicforecast Focus on: consumer spending – should we be worried? Fig. 6 Expected growth in domestic sales over the next 12 months % 6 5 4 3 2 1 0 -1 Q4 2007 Q2 Q4 2008 Q2 Q4 2009 Q2 Q4 2010 Q2 Q4 2011 Q2 Q4 2012 Q2 Q4 2013 Source: ICAEW/Grant Thornton Business Confidence Monitor, ONS, OBR forecasts for household debt A consumer debt boom is not an immediate concern but the situation should be monitored by policymakers. In the Autumn Statement, the Chancellor should examine ways of supporting business investment and exports, helping to secure a sustainable economic recovery. A concern in many quarters over the shape of the current recovery is the extent to which consumer spending is driving growth and whether there’s a risk of a surge in consumer debt levels given the current trajectory of spending. ONS data show that the household saving ratio (the share of disposable income not consumed) fell sharply from 7.4% to 5.9% between Q2 2012 and Q2 2013. Lending to consumers has also been growing according to the latest data. Further, notably, the Office for Budget Responsibility’s (OBR’s) March 2013 forecast is for household debt to rise, as a share of income, between 2014 and 2018. ICAEW’s central view is that the current trajectory of consumer spending is not an immediate concern, though trends in household debt should be watched closely icaew.com/ukeconomicforecast by policymakers, especially when considering the future of schemes such as Funding for Lending and Help to Buy. Functioning credit markets have an important role to play in any modern economy and some return to credit growth is welcome after the financial crisis, but there is a risk of this credit growth becoming unsustainable and the UK economy returning towards the model of debt-fuelled consumption that preceded the crisis. High levels of household debt – particularly mortgage debt – could prove problematic once the Bank of England starts to raise interest rates. The latest BCM provides early signs that the economy is likely to become more investment- and exportoriented over the coming year, but policymakers could do more to encourage their development and strengthen the sustainability 7 Focus on: consumer spending – should we be worried? (Continued) Fig. 7 Household liabilities as a share of household disposable income (%) % 180 170 160 150 140 130 120 110 100 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 2015 Q1 2017 Source: ICAEW/Grant Thornton Business Confidence Monitor, ONS, OBR forecasts for household debt of the recovery – something the Chancellor should consider in the Autumn Statement and next year’s Budget. In the 2013 ICAEW Cash Surplus Survey, the most commonly cited government policy that would encourage investment of business cash reserves was tax incentives and reliefs on investment. Improved access to credit facilities from banks and stock markets was also a commonly cited change that would encourage businesses to invest their cash surplus. This suggests that government could perhaps make better use of its balance sheet to unlock business investment growth – perhaps offering a business investment counterpart to Help to Buy. Government could also potentially offer time-limited tax breaks to incentivise investment. 8 Policymakers could help exporters rebalance towards fast-growing emerging markets by improving trading relations with these economies. As long as the UK remains disproportionately focused towards exporting to those economies that are underperforming average global growth – such as the eurozone - the ability to achieve a significant exportled recovery will be limited. Although significant progress in rebalancing exports has already been achieved – the value share of goods and services exported to the EU fell from 54.8% in 2002 to 45.1% in 2012 – there is still significant scope to rebalance further, especially if the Chancellor wants to realise his March 2012 Budget ambition to more than double annual exports to £1 trillion by 2020. There may be scope for policymakers to provide more support for exporters in the UK; compared with some other major economies, government does relatively little to help exporting businesses. For example, Germany’s Export Credit Agency (ECA), Hermes, provided e29.1bn (£23.6bn) of financial support to German exporters in 2012, while the UK equivalent, the Export Credits Guarantee Department (ECGD), provided just £4.3bn. This suggests that UK policymakers could potentially do more to bolster exports. icaew.com/ukeconomicforecast Forecasting methodology Headline economic forecasts 2007 2008 2009 2010 2011 2012 2013f 2014f +3.4% -0.8% -5.2% +1.7% +1.1% +0.1% +1.6% +2.9% +13.7% +4.0% -15.2% +1.7% -1.3% +2.6% -5.2% +5.5% 2007 2008 2009 2010 2011 2012 2013f 2014f Earnings (total pay) – annual growth +4.7% +3.8% +0.0% +2.3% +2.4% +1.3% +1.1% +1.7% Employment – annual growth +0.7% +0.7% -1.6% +0.2% +0.5% +1.2% +1.2% +0.8% 5.3% 5.7% 7.7% 7.8% 8.1% 7.9% 7.6% 7.2% 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. icaew.com/ukeconomicforecast 9 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 [email protected] icaew.com/ukeconomicforecast 10 linkedin.com – find ICAEW twitter.com/icaew facebook.com/icaew icaew.com/ukeconomicforecast © ICAEW 2013 MKTPLN12745 11/13