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ECONOMIC INSIGHT MONTHLY BRIEFING FROM ICAEW’S ECONOMIC ADVISERS April 2012 UK looks set to avoid recession, though the recovery will be choppy This month will see the release of the initial estimate of economic growth in the first quarter of 2012, which will show whether or not the UK has avoided recession (for now). Overall, the latest economic data suggest the UK economy will expand at the start of the year, with the latest leading indicators pointing to growth in both the manufacturing and services sectors. An easing of concerns about an immediate financial crisis in the eurozone means that the shortterm economic outlook looks better now than at the start of the year. Positive growth at the start of the year should take some pressure off the government over its handling of the economy, though the consensus view remains that the recovery will be choppy with considerable downside risks to growth. Moreover, not everyone is convinced that the UK has avoided a recession – despite encouraging signs from leading indicators, the Organisation for Economic Co-operation and Development (OECD) has recently forecast that the UK economy will contract by 0.1% in Q1 2012. Economists almost unanimously believe the eurozone is in the midst of a recession at present, as fiscal austerity in countries with high levels of government debt constrains growth. In the last quarter of 2011 even the German economy contracted, illustrating the economic fragility engulfing the single currency area at present. This fragility will bear down on UK – and world – growth over the coming quarters. BUSINESS WITH CONFIDENCE icaew.com/economicinsight Household spending power will struggle to grow … …% though personal allowance increase 2.5 will provide respite for most workers The Office for National Statistics (ONS) has revised down its estimate of GDP growth in the final quarter of 2011. The latest data showed that GDP contracted at a quarter-on-quarter rate of 0.3% in Q4 2011, down from previous estimates of 0.2%. The latest data also showed a 0.2% decline in real (ie, inflation adjusted) household disposable incomes in the final quarter of 2011 compared with Q3 2011, meaning that household spending power continued to fall at the end of the year. The March 2012 Budget announced a further increase in1.5income tax-free personal allowances from next year – in1.0April 2013, personal allowances will be increased to £9,205, reducing the amount of income tax paid by the 0.5 typical UK household. This is an increase of £1,100 from its current level and a big step towards the government’s 0.0 goal of raising the personal allowance to £10,000 by the -0.5 end of the current parliament. The increase in the 2013/14 allowance is expected to lift an additional 840,000 people -1.0 out of income tax altogether. -1.5 2.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Figure 1: Real household disposable incomes, annual % change Figure 2: UK income tax-free personal allowance and higher rate income tax threshold (£000s) % 2.5 46 10 2.0 44 9 1.5 42 1.0 8 0.5 40 38 7 0.0 -0.5 6 -1.0 5 -1.5 36 34 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 32 30 4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Personal allowance Source: ONS, OBR forecasts Higher rate threshold Source: HMRC Figure 1 shows, for the year as a whole real incomes 46 fell by 1.2% in 2011, as household incomes failed to keep 44 9 pace with the rising cost of living – inflation was almost double average earnings growth last year. Furthermore,42 8 real incomes aren’t expected to recover strongly any 40 time soon, as unemployment rises and earnings growth 38 7 remains weak. The Office for Budget Responsibility (OBR) expects real incomes to grow by just 0.2% and 36 6 0.5% in 2012 and 2013 respectively. This means that, 34 even in 2013, real incomes will be some 0.7% below 5 32 their 2009 peak. 10 As spending power points to a frail consumer 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 environment in the short term, which will heavily Personal Higher rategiven threshold bear down onallowance the UK economic recovery, that household consumption accounts for about 60% of national income. 4 Squeezed Those on relatively high incomes will, however, see a 14 higher proportion of their income subject to the 40% rate 12 of income tax, which was something of a ‘stealth tax’ in the 2012 Budget – Figure 2 illustrates. The threshold 10 at which income is subject to 40% income tax is being 8 reduced from £42,475 this year to £41,450 from next April, dragging more earners into the higher tax bracket. 6 Pensioners will also be hit by a planned freeze in age4 related allowances in the Budget – the so-called ‘granny 2 tax’. 0 4 The highest earners in the country will enjoy a tax cut -2 next year, as the top rate of income tax for those from -4 earning more than £150,000 per year is reduced from 2010 2011 2012 2013 2014 2015 2016 50% to 45%. This was a controversial announcement, Q1 2012at a time given that the2012 taxforecast cut for top earners comes March ICAEW/Grant Thornton when many households continue to struggle with the November 2011 forecast BCM – capital investment ongoing economic squeeze on living standards. Although growth expectations new analysis by HM Revenue & Customs casts doubt on the notion that the 50% rate of income tax raised much tax revenue, the reduction in the top rate of income tax remains unpalatable among the electorate – a YouGov poll conducted the day after Budget day showed 55% of 160 people opposed the decision to cut the 50% tax rate to 140 45%, with just 32% in support. 2 120 0 100 -2 80 14 12 10 8 6 -4 2010 2011 2012 March 2012 forecast November 2011 forecast 2013 2014 2015 2016 Q1 2012 ICAEW/Grant Thornton BCM – capital investment growth expectations 60 40 20 0 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 4 46 10 44 9 OBR sharply revises down investment42 8forecasts 40 In its latest forecasts, the OBR sharply revised down 38 its estimate of business investment growth this year – 36 6business investment is now expected to grow by 0.7% in 2012, down from 7.6% in the OBR’s November 34 5forecast. As Figure 3 shows, the latest growth forecast is 32 broadly in line with that indicated by businesses in the last 30 4ICAEW/Grant Thornton Business Confidence Monitor (BCM); 2000 2001 2002 2003 BCM, 2004 2005 2006 2007 2008 2010 2011 2012 2013 in the Q1 2012 businesses on 2009 average expected to increase capital investment by 0.9% the next Personal allowance Higher over rate threshold 12 months. 7 2 0 -2 Petrol prices hit a record high -4 With global oil remaining stubbornly elevated – 2016 2010 2011prices2012 2013 2014 2015 brent crude oil continues to trade at over $120 per barrel Q1 2012 March forecast – the price of2012 petrol in the UK has risen in recent weeks to ICAEW/Grant Thornton November 2011 forecast reach a record high, as shown in Figure 4 below. BCM – capital investment growth expectations Figure 4: Pump price of unleaded petrol, pence per litre 160 140 120 Figure 3: Business investment growth, % 100 80 14 12 60 10 40 8 20 6 0 Mar Jun 4 Sep Dec Mar 2007 2 0 Jun 2008 Sep Dec Mar Jun Sep Dec Mar 2009 Jun Sep Dec Mar 2010 Jun Sep Dec Mar 2011 2012 Source: Department of Energy & Climate Change -2 -4 2010 2011 2012 2013 March 2012 forecast November 2011 forecast 2014 2015 2016 Q1 2012 ICAEW/Grant Thornton BCM – capital investment growth expectations Source: OBR, ICAEW The latest view from the OBR suggests that an investmentled recovery will not emerge until next year at the earliest. 140 Business sentiment remains weak while lending to smalland-medium sized businesses continues to contract 120 according to the latest Bank of England Trends in Lending 100 publication. Until confidence among business improves and access to credit becomes less tight, investment 80 growth is likely to remain constrained. 160 60 Despite the sharp downward revision in business investment growth this year, the OBR still expects very strong growth in the medium term; business investment 20 is expected to rise by nearly 9% in 2013 and by over 10% 0 inMarboth 2015 2016. This is well of Junaverage Jun Sep Dec Marand Jun Sep Dec Mar Jun Sep Dec Mar in Jun excess Sep Dec Mar Sep Dec Mar growth years before between 2000 2007 in the 2008 2009 the recession; 2010 2011 2012 and 2007, business investment growth averaged just 3.3% per year. Against a backdrop of prolonged fiscal austerity and economic weakness in the UK, it is unclear why business investment will grow as strongly as the OBR anticipates. 40 Panic buying of petrol towards the end of March – following government announcements that motorists should fill up their cars in preparation for a strike among fuel tanker drivers – has pushed up the price of petrol still further, as petrol stations ran out of cheaper stocks of fuel. The cost of filling up a family car with a 70-litre tank now stands at close to £100 – a significant squeeze on household budgets. And petrol prices can be expected to remain elevated or rise still further in the summer, as a planned three-pence-per-litre fuel duty rise goes ahead in August, despite speculation that the Chancellor would postpone the rise in last month’s Budget. High transport prices risk keeping inflation in the UK elevated for longer, which will hit household budgets as well as making for a challenging policy environment for the Bank of England, which is meant to keep annual consumer price inflation at close to 2.0%. Inflation currently stands comfortably above this, at 3.4% on the latest (February) data. ICAEW and cebr work in partnership to deliver monthly economic briefings icaew.com/economicinsight cebr.com economic insight APRIL 2 012 Controversial Budget will dominate local election debates While most commentators believe the UK economy has avoided recession at the start of 2012, few believe that economic growth will be by any means robust – the road to recovery remains choppy, with substantial downside risks that could derail the economy. High transport costs mean that inflation could remain elevated for some time, while ongoing instability in the eurozone threatens to significantly bear down on UK and world economic growth. The measures announced in last month’s Budget remain subject to controversy. Although the planned increase in personal allowances next year will boost the incomes of most workers, some will be impacted by the reduction in the 40% income tax threshold, while pensioners will be hit by a freeze in age-related allowances. The reduction in the top rate of income tax from 50% to 45% from next year has also prompted cries that the recent Budget benefits the richest members of society at the expense of others – a likely key theme in the upcoming May 2012 local elections. Key dates for the month ahead: Date Event / releasePrediction 25 April Q1 2012 GDP – first estimate Recession avoided 10 May Bank of England interest rate decision Rates on hold Economic Insight Register for updates >> ICAEW ICAEW is a professional membership organisation, supporting over 138,000 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. 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 1993, Cebr has been at the forefront of business and public interest research. It provides analysis, forecasts and strategic advice to major multinational companies, financial institutions, government departments and trade bodies. ICAEW Chartered Accountants’ Hall Moorgate Place London EC2R 6EA UK icaew.com