Download ECONOMIC INSIGHT MONTHLY BRIEFING FROM ICAEW’S ECONOMIC ADVISERS ApRIL 2012

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.
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to deliver monthly economic briefings
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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
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