UK Economic Forecast Q2 2015
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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
icaew.com/ukeconomicforecast 3Economic outlook
FIG. 1 REAL GDP – ANNUAL GROWTH FIG. 2 REAL GDP – INDEX (2007 = 100)
% 4 108
2.8 106.3
3 2.6 106
2.3
2 1.9 1.6 1.7 104.0
104
1 0.7 102 101.1
0 100 99.7 99.4
100 98.8
-1 -0.3
98 97.2
-2 96 95.4
-3 94
-4 92
-5 -4.3
90
-6 88
2007 2008 2009 2010 2011 2012 2013 2014 2015f 2007 2008 2009 2010 2011 2012 2013 2014 2015f
Source: ONS, ICAEW forecasts
The UK economy is expected to UK economic growth disappointed in a widening in the trade deficit and
grow by 2.3% in 2015, down the first quarter of the year, with GDP shaving almost a whole percentage
from ICAEW’s previous forecast expanding by just 0.3%. This is half point off quarterly growth in Q1 2015.
of 2.4%. Expect a year of two the 0.6% reported for Q4 2014 and Addressing the economy’s overreliance
also slower than that seen across a on consumer spending and achieving
halves, with a pick-up in the
range of European economies in Q1. trade and investment-led growth has
construction sector boosting
to be a priority for policymakers in the
growth in the second half of A key driver of the sluggish rate of new parliament.
2015. growth in Q1 was poor performance
in the construction sector. According Overall, ICAEW expects economic
to the Office for National Statistics growth to stand at 2.3% this year,
(ONS), output in the sector contracted down from the 2.8% seen last year
by 1.1% compared with Q4 2014. and also lower than ICAEW’s previous
More recent data suggest that the forecast of 2.4% growth. There are no
sector has started to pick up and BCM signs that the economy is overheating
this quarter shows a sharp increase and, with inflation on the consumer
in confidence for construction firms. price index (CPI) measure now
This should support growth in Q2 showing modest deflation, the Bank
and beyond. of England is unlikely to budge on
interest rates this year. The Bank Rate
In addition, the UK’s poor trade is expected to remain on hold until
position held back growth. Exports early 2016 and even then rates are
fell while imports rose, leading to likely to rise only gradually.
icaew.com/ukeconomicforecast 4Business investment
FIG. 3 REAL BUSINESS INVESTMENT – ANNUAL GROWTH
% 15
10 8.1
6.0 6.8
5.3 4.0
5 3.3 3.7 4.2
0
-5
-10
-15 -14.4
-20
2007 2008 2009 2010 2011 2012 2013 2014 2015f
Source: ONS, ICAEW forecasts
A mixed picture for We have revised down our forecast of oil reserves in the North Sea. As long
business investment, with business investment growth in 2015 as oil prices remain subdued, this
the construction sector from 5.2% to 4.0%. Businesses have will be a factor holding back the UK’s
outshining the rest. continued to rein in their investment investment performance.
intentions this quarter, amid
uncertainty. Even though the general Across the sectors, BCM shows a
election outcome is now known, mixed picture for capital spending
businesses still have to contend with over the next 12 months. The
a number of unknowns. Uncertainty construction sector is expected to see
over the economic situation in the the strongest growth in investment
eurozone remains a concern – with a for the year ahead, followed by
Greek exit from the single currency the property, banking, finance and
area a distinct possibility. A British exit insurance sectors. Capital spending
from the EU, following a referendum is expected to fall by 1.1% in the
on membership, could also occur. energy, water and mining sectors
over the next 12 months, amid falling
Total business investment in the UK or subdued prices for a range of
is being held back by the oil & gas commodities.
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 5Labour market
FIG. 4 AVERAGE EARNINGS – ANNUAL GROWTH FIG. 5 UNEMPLOYMENT RATE
% 6 % 9
5 4.9 8.5
8.1 8.0
8 7.9
4 3.5 7.6 7.6
7.5
3 2.7
2.3 7
2.0
2
1.3 1.3 6.5
1.1 6.2
1 6
5.7
0 5.5 5.3
-0.2 5.1
-1 5
2007 2008 2009 2010 2011 2012 2013 2014 2015f 2007 2008 2009 2010 2011 2012 2013 2014 2015f
Source: ONS, ICAEW forecasts Source: ONS, ICAEW forecasts
The unemployment rate is Slack in the UK labour market in London and the South East.
forecast to stand at its lowest continues to diminish. In Q1 2015,
rate in a decade. the unemployment rate stood at BCM suggests that employment
5.5% – the lowest rate since Q2 2008. growth in the UK has peaked
ICAEW expects the rate to fall further and will slow over the coming
over the coming months, averaging months. Achieving further falls in
5.1% this year – the lowest annual unemployment beyond this year
rate since 2005. will prove relatively challenging,
especially as more fiscal austerity is
Unemployment has fallen across implemented. Between now and the
every region of the UK over the past end of 2019, the Office for Budget
year, though there are substantial Responsibility (OBR) expects a further
variations in the pace of decline. 800,000 public sector jobs to be axed.
While the unemployment rate fell year
on year by 1.3 percentage points in As well as curtailing future job
England in Q1 2015, it declined by creation, austerity will continue to
0.5 percentage points in Scotland and have an impact on employee earnings.
just 0.1 percentage points in Wales. Public sector pay restraint is holding
Unemployment rates are higher in back overall wage growth in the
the North of England and this is likely economy and this is likely to continue,
to remain the case given the North’s offsetting improvements in private
greater reliance on public sector sector earnings. ICAEW’s forecast of
employment. This accounts for 21% earnings growth in 2015 remains
of jobs in the North East, and just 15% unchanged at 2.0%.
icaew.com/ukeconomicforecast 6Focus on: Productivity and the northern powerhouse
FIG. 6 GDP PER WORKER (2000=100) FIG. 7 NUMBER OF BUSINESSES PER 10,000 ADULTS
120 1,400
1,200
115
1,000
110
800
105
600
100 400
95 200
90 0
London
Scotland
Northern Ireland
East of England
Wales
East Midlands
West Midlands
North East
Yorks and Humber
North West
South West
South East
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f
Source: ONS, BIS, ICAEW forecast
To achieve solid economic Chancellor George Osborne has the US. Ultimately, this is not just
growth beyond this year, the UK recently stated that he intends to bad for long-term economic growth,
needs to address its productivity focus on measures to address the UK’s but for households and businesses
problem. Spreading growth poor productivity. He is planning to do too. Productivity growth is a key
it in part through improving transport determinant of living standards and
across the regions is one way of
and broadband infrastructure as well more productive workers receive
doing this.
as responding to skills shortages across higher salaries. Businesses can also
the economy. In the Queen’s Speech benefit from greater profits.
it was announced that ‘measures will
be introduced to raise the productive The Chancellor is right to aim to
potential of the economy and increase address skills shortages over the
living standards’. coming years. BCM data show that a
lack of skills has become a growing
Productivity has struggled to grow issue over the past 12 months,
since the financial crisis and ICAEW’s particularly in certain sectors such as
forecasts suggest that GDP per worker, construction where shortages are
a key measure of productivity, will rise starting to act as a constraint on
by just 0.8% this year. This is less than growth.
half the typical rate of productivity
growth seen between 2001 and 2007. Increased government infrastructure
investment should also bolster
Per hour worked, the typical UK productivity and reduce the UK’s
employee produces less than a typical underperformance relative to other
employee in Germany, France and economies such as Germany. But
icaew.com/ukeconomicforecast 7Focus on: Productivity and the northern powerhouse (continued)
this alone is unlikely to eliminate the seen in the North East of England.
productivity gap. Substantial tax incentives, and indeed
encouragement of tax competition
Improving economic growth outside across the regions, could be a key
of the South of England would be a way of addressing this. If the UK’s
powerful way of boosting productivity. regions could compete on corporation
After the Conservatives gained a tax and income tax, they would be
majority in the general election, David able to retain and draw in top talent
Cameron vowed to govern on a ‘one in a way that measures such as HS2
nation’ platform and George Osborne will never do. With devolution now
has often mentioned his wish to build a hot topic, the government has
a ‘northern powerhouse’ economy. a strong opportunity to introduce
In part this can be achieved through bold measures to encourage tax
transport and skills investment, but competition, and ultimately to boost
this is unlikely to be sufficient and productivity and living standards
may be unsuccessful. Newly-skilled across the UK. The July Budget would
individuals may choose to migrate to be a good time to progress this.
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.
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 8Forecasting 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
Labour market forecasts
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
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 9About 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
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