Download UK ECONOMIC FORECAST Q4 2013 BUSINESS WITH coNfIdENcE icaew.com/ukeconomicforecast

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