Download UK Economic Forecast Q2 2015 BUSINESS WITH CONFIDENCE icaew.com/ukeconomicforecast

UK Economic Forecast
Q2 2015
BUSINESS WITH CONFIDENCE
icaew.com/ukeconomicforecast
icaew.com/ukeconomicforecast
2
Introduction
Welcome to the Q2 2015 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 in all regions of the UK, surveyed through the quarterly
ICAEW/Grant Thornton UK Business Confidence Monitor (BCM).
Key findings this quarter
• The economy is forecast to grow by 2.3% in 2015. This is a downward revision from
our previous prediction of 2.4%, with businesses reporting that turnover and profit
growth have peaked.
• Business investment growth is expected to slow from 6.8% in 2014 to 4.0% in
2015. Although uncertainty around the general election has come to an end, subdued
oil prices are holding back capital spending in the oil & gas sector. In addition,
uncertainty over the outcome of the referendum on the UK’s membership of the EU may
be impacting investment decisions among some organisations.
• The unemployment rate is expected to average just 5.1% this year. This is the lowest
annual rate of unemployment since 2005, when it stood at 4.8%.
• Productivity growth remains sluggish – ICAEW expects GDP per worker to rise by just
0.8% this year, less than half the typical rate seen between 2001 and 2007.
• ICAEW does not expect the Bank of England to raise the Bank Rate until early 2016.
With the headline rate of inflation now in negative territory – deflation – the Bank is
unlikely to move on rates this year.
The UK economy faces a number of significant challenges in the new parliament. The
fiscal deficit – which still stands at close to £90bn per year – needs to be reduced. This
will require difficult spending cuts and some 800,000 public sector jobs are likely to be
shed over the next four years. Although the economic situation in the eurozone appears
to be improving, Greece remains a concern, with the country’s departure from the single
currency area still a strong possibility. In addition, the UK continues to underperform in
terms of productivity – something which the Chancellor should be looking to address in the
July Budget. Without productivity-enhancing measures, sustainable economic growth and
rises in living standards will be unachievable.
icaew.com/ukeconomicforecast
icaew.com
3
Economic outlook
FIG. 1 REAL GDP – ANNUAL GROWTH
FIG. 2 REAL GDP – INDEX (2007 = 100)
% 4
3
108
2.8
2.6
1.9
2
1.7
1.6
1
2.3
102
0
100
-0.3
96
-3
94
-6
2007
2008
101.1
99.7
98.8
2009
99.4
97.2
95.4
92
-4.3
-5
100
98
-2
-4
104.0
104
0.7
-1
106.3
106
90
2010
2011
2012
2013
2014
2015f
88
2007
2008
2009
2010
2011
2012
2013
2014
2015f
Source: ONS, ICAEW forecasts
The UK economy is expected to
grow by 2.3% in 2015, down
from ICAEW’s previous forecast
of 2.4%. Expect a year of two
halves, with a pick-up in the
construction sector boosting
growth in the second half of
2015.
UK economic growth disappointed in
the first quarter of the year, with GDP
expanding by just 0.3%. This is half
the 0.6% reported for Q4 2014 and
also slower than that seen across a
range of European economies in Q1.
A key driver of the sluggish rate of
growth in Q1 was poor performance
in the construction sector. According
to the Office for National Statistics
(ONS), output in the sector contracted
by 1.1% compared with Q4 2014.
More recent data suggest that the
sector has started to pick up and BCM
this quarter shows a sharp increase
in confidence for construction firms.
This should support growth in Q2
and beyond.
In addition, the UK’s poor trade
position held back growth. Exports
fell while imports rose, leading to
icaew.com/ukeconomicforecast
a widening in the trade deficit and
shaving almost a whole percentage
point off quarterly growth in Q1 2015.
Addressing the economy’s overreliance
on consumer spending and achieving
trade and investment-led growth has
to be a priority for policymakers in the
new parliament.
Overall, ICAEW expects economic
growth to stand at 2.3% this year,
down from the 2.8% seen last year
and also lower than ICAEW’s previous
forecast of 2.4% growth. There are no
signs that the economy is overheating
and, with inflation on the consumer
price index (CPI) measure now
showing modest deflation, the Bank
of England is unlikely to budge on
interest rates this year. The Bank Rate
is expected to remain on hold until
early 2016 and even then rates are
likely to rise only gradually.
4
Business investment
FIG. 3 REAL BUSINESS INVESTMENT – ANNUAL GROWTH
% 15
10
8.1
5
3.7
3.3
6.0
4.2
5.3
6.8
4.0
0
-5
-10
-15
-20
-14.4
2007
2008
2009
2010
2011
2012
2013
2014
2015f
Source: ONS, ICAEW forecasts
A mixed picture for
business investment, with
the construction sector
outshining the rest.
We have revised down our forecast of
business investment growth in 2015
from 5.2% to 4.0%. Businesses have
continued to rein in their investment
intentions this quarter, amid
uncertainty. Even though the general
election outcome is now known,
businesses still have to contend with
a number of unknowns. Uncertainty
over the economic situation in the
eurozone remains a concern – with a
Greek exit from the single currency
area a distinct possibility. A British exit
from the EU, following a referendum
on membership, could also occur.
Total business investment in the UK
is being held back by the oil & gas
extraction sector. Capital spending
by the sector has weakened due to a
combination of relatively low prices
and high exploration costs, partly
arising because of the reduction of
icaew.com/ukeconomicforecast
oil reserves in the North Sea. As long
as oil prices remain subdued, this
will be a factor holding back the UK’s
investment performance.
Across the sectors, BCM shows a
mixed picture for capital spending
over the next 12 months. The
construction sector is expected to see
the strongest growth in investment
for the year ahead, followed by
the property, banking, finance and
insurance sectors. Capital spending
is expected to fall by 1.1% in the
energy, water and mining sectors
over the next 12 months, amid falling
or subdued prices for a range of
commodities.
5
Labour market
FIG. 4 AVERAGE EARNINGS – ANNUAL GROWTH
%
% 6
5
4.9
4
9
8.5
8
3.5
3
2.3
7.6
7.5
2.7
2.0
2
1.3
1.3
1
1.1
2008
2009
2010
2011
2012
2013
2014
8.1
8.0
7.6
7
5.5
-0.2
2007
7.9
6.5
6.2
6
0
-1
FIG. 5 UNEMPLOYMENT RATE
2015f
5
5.7
5.3
2007
5.1
2008
2009
2010
2011
2012
Source: ONS, ICAEW forecasts
Source: ONS, ICAEW forecasts
The unemployment rate is
forecast to stand at its lowest
rate in a decade.
Slack in the UK labour market
continues to diminish. In Q1 2015,
the unemployment rate stood at
5.5% – the lowest rate since Q2 2008.
ICAEW expects the rate to fall further
over the coming months, averaging
5.1% this year – the lowest annual
rate since 2005.
Unemployment has fallen across
every region of the UK over the past
year, though there are substantial
variations in the pace of decline.
While the unemployment rate fell year
on year by 1.3 percentage points in
England in Q1 2015, it declined by
0.5 percentage points in Scotland and
just 0.1 percentage points in Wales.
Unemployment rates are higher in
the North of England and this is likely
to remain the case given the North’s
greater reliance on public sector
employment. This accounts for 21%
of jobs in the North East, and just 15%
icaew.com/ukeconomicforecast
2013
2014
2015f
in London and the South East.
BCM suggests that employment
growth in the UK has peaked
and will slow over the coming
months. Achieving further falls in
unemployment beyond this year
will prove relatively challenging,
especially as more fiscal austerity is
implemented. Between now and the
end of 2019, the Office for Budget
Responsibility (OBR) expects a further
800,000 public sector jobs to be axed.
As well as curtailing future job
creation, austerity will continue to
have an impact on employee earnings.
Public sector pay restraint is holding
back overall wage growth in the
economy and this is likely to continue,
offsetting improvements in private
sector earnings. ICAEW’s forecast of
earnings growth in 2015 remains
unchanged at 2.0%.
6
Focus on: Productivity and the northern powerhouse
FIG. 6 GDP PER WORKER (2000=100)
FIG. 7 NUMBER OF BUSINESSES PER 10,000 ADULTS
1,400
120
1,200
115
1,000
110
800
105
To achieve solid economic
growth beyond this year, the UK
needs to address its productivity
problem. Spreading growth
across the regions is one way of
doing this.
Chancellor George Osborne has
recently stated that he intends to
focus on measures to address the UK’s
poor productivity. He is planning to do
it in part through improving transport
and broadband infrastructure as well
as responding to skills shortages across
the economy. In the Queen’s Speech
it was announced that ‘measures will
be introduced to raise the productive
potential of the economy and increase
living standards’.
Productivity has struggled to grow
since the financial crisis and ICAEW’s
forecasts suggest that GDP per worker,
a key measure of productivity, will rise
by just 0.8% this year. This is less than
half the typical rate of productivity
growth seen between 2001 and 2007.
Per hour worked, the typical UK
employee produces less than a typical
employee in Germany, France and
icaew.com/ukeconomicforecast
London
South East
South West
East of England
West Midlands
East Midlands
Source: ONS, BIS, ICAEW forecast
North West
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f
Wales
0
90
Northern Ireland
200
Yorks and Humber
95
Scotland
400
North East
600
100
the US. Ultimately, this is not just
bad for long-term economic growth,
but for households and businesses
too. Productivity growth is a key
determinant of living standards and
more productive workers receive
higher salaries. Businesses can also
benefit from greater profits.
The Chancellor is right to aim to
address skills shortages over the
coming years. BCM data show that a
lack of skills has become a growing
issue over the past 12 months,
particularly in certain sectors such as
construction where shortages are
starting to act as a constraint on
growth.
Increased government infrastructure
investment should also bolster
productivity and reduce the UK’s
underperformance relative to other
economies such as Germany. But
7
Focus on: Productivity and the northern powerhouse (continued)
this alone is unlikely to eliminate the
productivity gap.
Improving economic growth outside
of the South of England would be a
powerful way of boosting productivity.
After the Conservatives gained a
majority in the general election, David
Cameron vowed to govern on a ‘one
nation’ platform and George Osborne
has often mentioned his wish to build
a ‘northern powerhouse’ economy.
In part this can be achieved through
transport and skills investment, but
this is unlikely to be sufficient and
may be unsuccessful. Newly-skilled
individuals may choose to migrate to
the South of England rather than stay
in, for example, the North. Some have
argued that the HS2 rail line could
end up benefiting London more than
other regions.
seen in the North East of England.
Substantial tax incentives, and indeed
encouragement of tax competition
across the regions, could be a key
way of addressing this. If the UK’s
regions could compete on corporation
tax and income tax, they would be
able to retain and draw in top talent
in a way that measures such as HS2
will never do. With devolution now
a hot topic, the government has
a strong opportunity to introduce
bold measures to encourage tax
competition, and ultimately to boost
productivity and living standards
across the UK. The July Budget would
be a good time to progress this.
Investment in transport and skills
needs to be complemented with
further measures to bolster the
private sector throughout the UK.
The difference in entrepreneurial
activity across the regions is stark.
Per 10,000 adults, London has about
1,400 businesses, double the 700
icaew.com/ukeconomicforecast
8
Forecasting methodology
Headline economic forecasts
2007
2008
2009
2010
2011
2012
2013
2014
2015f
Real GDP – annual growth %
+2.6
-0.3
-4.3
+1.9
+1.6
+0.7
+1.7
+2.8
+2.3
Real business investment – annual growth %
+8.1
+3.3
-14.4
+3.7
+6.0
+4.2
+5.3
+6.8
+4.0
2007
2008
2009
2010
2011
2012
2013
2014
2015f
Earnings (total pay) – annual growth %
+4.9
+3.5
-0.2
+2.3
+2.7
+1.3
+1.3
+1.1
+2.0
Employment – annual growth %
+0.8
+0.9
-1.6
+0.2
+0.5
+1.1
+1.2
+2.3
+1.5
Unemployment rate %
+5.3
+5.7
+7.6
+7.9
+8.1
+8.0
+7.6
+6.2
+5.1
Labour market forecasts
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
144,000 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
E [email protected]
icaew.com/ukeconomicforecast
linkedin.com – find ICAEW
twitter.com/icaew
facebook.com/icaew
© ICAEW 2015 MKTPLN14024 06/15