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

ECONOMIC INSIGHT
MONTHLY BRIEFING FROM ICAEW’S
ECONOMIC ADVISERS
february 2012
Businesses cautious
against gloomy
economic backdrop
The latest ICAEW/Grant Thornton UK Business
Confidence Monitor (BCM) shows that business
confidence remains firmly in negative territory
at the start of 2012 with little movement from
the previous quarter. The BCM Confidence
Index rose slightly to -9.3 in Q1 2012, similar
to the -9.7 result in Q4 2011.
The Confidence Index is a leading indicator for
growth; it correctly predicted the end of the
recession in 2009, provided early warning signs
in 2007– 08 and pointed towards economic
contraction in Q4 2011. This quarter’s Confidence
Index suggests the UK economy could already
be in the midst of recession, defined as two
consecutive quarters of declining gross domestic
product (GDP).
BCM this quarter also shows that turnover
and profit growth expectations remain well
below levels seen before the financial crisis.
Businesses also appear to be reining in plans for
capital investment while employment growth
expectations remain weak – suggesting that firms
are reluctant to invest in the future. Overall,
BCM points towards a long, hard road to
recovery for the UK economy – something which
businesses, politicians and policy-makers slowly
seem to be coming to terms with.
BUSINESS WITH CONFIDENCE
icaew.com/economicinsight
UK economy contracts in final quarter
of 2011
BCM points to slowdown in capital
420
investment growth
The Office for National Statistics’ (ONS) preliminary
estimate of GDP in the UK for Q4 2011 showed the
economy contracting at a quarter-on-quarter rate
of 0.2%, reigniting fears that the UK could be heading
for a double-dip recession. Sector data showed output in
the production industries fell at a quarter-on-quarter rate
of 1.2%. Output in the construction sector decreased by
0.5%, while in the services sector output was unchanged
compared with Q3 2011.
With consumers seeing their spending power squeezed
400
An economy is technically in recession when GDP falls
for two consecutive quarters, and the latest ICAEW/Grant
Thornton UK Business Confidence Monitor (BCM) suggests
that this may be the case; the BCM Confidence Index
points towards a further quarterly contraction of 0.2%
in the economy in Q1 2012. But, even if the UK economy
does not contract further at the start of this year, growth
is likely to remain lacklustre in the short term as weak
consumer spending and government austerity measures
bear down on the economy.
by rising unemployment and weak earnings growth, and
the government embarking on an ambitious programme
380
of spending cuts, business investment – along with
exports – is expected to be a key driver of growth in the
360
UK economy over the coming years. Indeed, as figure 2
340
shows, the Office for Budget Responsibility (OBR) expects
business investment to grow strongly especially in the
320
outer years of its forecasting horizon. In 2015, business
investment is expected to grow by 13% and in 2016
300
it is expected to grow by 12%, in real terms. Even this
Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
year, the OBR expects business investment to grow at
2002 2003
2004
2005
2006 8%.
2007 2008 2009 2010 2011
a01
relatively
robust
rate
of about
GDP if trend growth continued
GDP
Figure Real
2: Business
investment, annual % Real
change
%
20
15
10
Figure 1: Real GDP (£bn, 2008 prices)
5
0
420
-5
400
-10
-15
380
-20
360
340
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
2002
2004
2006
2008
2010
2012
2014
2016 2017
Business Investment
320
Q1
OBR forecast
Source: ONS, OBR
300
Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
01 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Real GDP if trend growth continued
before the financial crisis, it is unclear how and why
businesses are going to expand investment spending
20
so rapidly.
25
%
20
The financial crisis and subsequent recession has had a
15
profound impact on the UK economy. Even on the latest
data, GDP is still some 3.8% below its pre-recession peak
10
in Q1 2008, as illustrated in figure 1. And GDP is even
5
further below where it would be if the economy had
0
continued
growing at its long-term trend rate from 2008
onwards, rather than the UK entering recession followed
-5
by sluggish recovery. Indeed, if trend growth had
-10
continued, output in Q4 2011 would be a staggering
-15
14.5% higher than it actually was – illustrating the size
of the ‘output gap’ created by the financial crisis.
-20
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
2002
2004
2006
2008
2010
2012
2014
2016 2017
Business Investment
35
30
25
20
Many analysts argue that these projections for investment
35
are far too bullish; with a relatively gloomy economic
backdrop and credit conditions still tight compared with
30
Real GDP
Source: ONS, Cebr analysis
40
40
OBR forecast
15
This quarter’s ICAEW/Grant Thornton UK Business
Confidence Monitor suggests that these concerns about
10
the OBR’s forecasts are well founded. Businesses expect
5
capital
investment to grow by just 0.9% over the next
12
0 months and capital investment growth expectations
Dec now
Jun fallen
Dec
Junthree
Dec consecutive
Jun
Dec quarters,
Jun
Dec indicating
Jun
Dec
have
for
that
businesses
are
becoming
increasingly
reluctant
to
2006 2007
2008
2009
2010
2011
invest in the future, probably related to cautiousness
over the economic outlook. Overall, real-terms business
investment growth of 8% this year is highly unlikely.
Q1
%
12
10
8
6
4
15
2
10
0
5
Jan
Jul
2006
Jan
Jul
2007
Jan
Jul
2008
Jan
Jul
2009
Jan
Jul
2010
Jan
Jul
2011
Jan
2012
-15
320
-20
300
Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
Unemployment continues to rise
01 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Data from the Office for National Statistics (ONS) showed
if trend growth rate
continued
Real GDP
that theReal
UKGDP
unemployment
increased to 8.4%
for the
three months to November 2011, a rise of 0.3 percentage
%
points on the quarter. The unemployment rate is now
20
at its highest level since the three months to November
1995.
15
The claimant count for December rose by 1,200 from
10
November’s total, representing a 0.1% rise from the
5
previous month, bringing the total number of claimants to
0
just
under 1.6m, up 9.8% on a year earlier. A closer look at
the
-5 claimant count data reveals more worrying trends for
young people, with long-term unemployment continuing
-10
to rise sharply. Over the last six months, the number of
-15
18–24 year olds claiming Jobseekers’ Allowance for over
a year has grown by an average of 14% every month,
-20
Q1of theQ1total from
Q1
Q1
Q1
Q1
Q1 2011.Q1
representing
a doubling
July
This Q1
is 2002
illustrated
in
figure
3.
2004
2006
2008
2010
2012
2014
2016 2017
Investment
forecast
FigureBusiness
3: Number
of 18–24 yearOBR
olds
claiming
Jobseekers’ Allowance for over 12 months, thousands
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
2002
2004
2006
2008
2010
2012
2014
2016 2017
Q1
Emerging contrast in US and European
Business Investment
OBR forecast
labour
markets
Further encouraging news on the health of the US
came this month as employment levels saw
a strong boost and the unemployment rate fell back to
35
its lowest since February 2009.
economy
40
30
Data released by the US Bureau of Labor Statistics (BLS)
that non-farm employment rose by 243,000
in January, compared to an increase of 203,000 in
20
December. This is particularly good news compared to
15
market expectations of an increase of 150,000 and the
10
estimates of ADP, a payroll processor, of 170,000. The
unemployment
rate fell back to 8.3% in January, the fifth
5
consecutive month of improvements. The last time that
0 unemployment rate was this low was almost three
the
Dec
Jun
Dec
Jun
Dec
Jun
Dec
Jun
Dec
Jun
Dec
years ago, before it had started to rise in earnest following
2006
2007
2008
2009 latest figures
2010
2011
the
recession
of 2008–09.
These
suggest
that peak unemployment following the downturn is well
past and the US economic recovery may be gaining
a stronger foothold.
25
showed
Figure 4: Unemployment rates in the EU, US and UK
40
%
35
12
30
10
25
20
8
15
6
10
4
5
2
0
Dec
Jun
Dec
Jun
2006 2007
Dec
2008
Jun
Dec
Jun
2009
Dec
Jun
2010
Dec
2011
Jan
The latest official data highlights the fragile state of the
UK labour market, which is quite likely to weaken over the
coming months. Slow economic growth and a realisation
among businesses that economic performance is likely
%
to remain sluggish in the medium term both seem likely
12
to cause unemployment to rise further this year. Many
economists have pointed out that unemployment rose
10
by less than expected during the recession, suggesting
that
UK employers have held on to overlarge, skilled
8
workforces in the expectation that they would avoid
6
rehiring
costs when the economy returned to solid
growth. Now that a return to solid growth anytime soon
4
seems
highly unlikely, businesses may start shedding
‘surplus’ staff, which will also push up unemployment.
2
0
Jul
2006
Jul
2006
Source: ONS
Jan
0
Jan
Jul
2007
Jan
Jul
2008
Jan
Jul
2009
EU (27 countries)
Jan
Jul
2010
US
Jan
Jul
2011
UK
Jan
2012
Jan
Jul
2007
Jan
Jul
2008
EU (27 countries)
Jan
Jul
2009
Jan
Jul
2010
US
Jan
Jul
2011
Jan
2012
UK
Source: US Bureau of Labor Statistics, Eurostat
In the EU, by contrast, unemployment has risen in recent
months, as shown in figure 4. The EU unemployment rate
was 9.9% in December 2011, unchanged from November
but up from 9.5% in January 2011. With the eurozone
looking set to enter recession this year, unemployment
is likely to rise still further across Europe, meaning that
a divergence in labour market trends between the US
and EU is likely to emerge over the coming months.
Overall, the US economy looks set to significantly
outperform the EU economy this year, though it too
remains exposed to a global economic slowdown. These
economies are important to the UK; exports of goods
and services to the EU accounted for 48% of total exports
in 2010, while exports to the US accounted for a further
17% of exports. Any slowdown in these economies would
seriously derail the prospect of an export-led recovery
in the UK.
ICAEW and cebr work in partnership
to deliver monthly economic briefings
icaew.com/economicinsight
cebr.com
economic insight
february 2 012
Short-term economic outlook remains
weak
The short-term economic outlook for the UK remains
weak. Consumers in 2012 are unlikely to see their living
standards improve significantly, as rising unemployment
and weak earnings growth impact on household spending
power. In addition, business investment is unlikely to be
buoyant while confidence in economic prospects remains
fragile – as illustrated in this quarter’s ICAEW/Grant
Thornton UK Business Confidence Monitor. Government
spending cuts will weigh down on the economy, while
the eurozone sovereign debt crisis is likely to dampen
export demand.
Bank of England Governor Sir Mervyn King recently
described the path to recovery as ‘arduous, long and
uneven’. Indeed, it is difficult to see where significant,
consistent growth will come from in the near term.
Businesses appear to be preparing themselves for a long,
hard road to economic recovery.
Key dates for the month ahead:
Date
Event / releasePrediction
24 February
Q4 2011 UK GDP Second Estimate
Unchanged
29 February
Lending to Individuals
Still weak
08 March
Bank of England interest rate decision
Rates on hold
Economic Insight
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