BCC UK Economic Forecast – June 2012

David Kern, Chief Economist at the BCC
The main purpose of the BCC Economic Forecast is to articulate a BCC view on economic topics that are relevant to our members, and to contribute to the wider public debate on policy issues. The Forecast also aims to complement the messages conveyed by the BCC’s Quarterly Economic Survey (QES).

Main messages
• • The eurozone’s problems, which will persist for a considerable period, will affect the UK. But our central scenario described in this forecast assumes that a major European recession and banking crisis will be avoided, and the most acute threats will be contained. • Our assumption is that and the UK will be able to achieve improved growth in 2013 & 2014. However, a disorderly euro breakdown is likely to result in much weaker UK growth. • The BCC is reducing its 2012 GDP growth forecast to 0.1%, from 0.6% predicted in March. The downgrading reflects negative growth in Q1 2012 and worsening eurozone problems. • But we are raising slightly our 2013 forecast to 1.9%, from 1.8% in March. The eurozone will still have a dampening effect on the UK. But, as inflation falls and the squeeze on living standards eases, ample excess capacity will make possible a modest rebound in UK growth. • • For 2014, we are forecasting a further upturn in annual average UK GDP growth, to 2.3%. After declining by 0.3% in Q4 2011, GDP recorded a further 0.3% fall in Q1 2012; this pushed the UK economy into technical recession. Many analysts question the ONS’ assessment that GDP fell in Q1 2012. Most business surveys signalled positive Q1 growth. The increase in the number of hours actually worked in Q1 raises doubts regarding the reported GDP fall. • The ONS’ Q1 estimates may be revised up in due course. But a revision is not imminent, and we are therefore using the current ONS figures as the starting point for our new forecast. • The immediate outlook remains highly uncertain. Growth in Q2 2012 is likely to be zero, or even slightly negative, due to the additional Bank Holiday for the Diamond Jubilee. But UK GDP growth is set to improve from Q3 2012, averaging 0.5% per quarter until end 2013.

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• The precise scale of any stimulus that can be safely provided in the near term is a matter of judgement.• In spite of the serious problems facing the UK economy. In our March forecast we also predicted that the MPC would start raising official rates in Q4 2013. and make greater use of the flexibility provided by its fiscal mandate. Such a move cannot be ruled out. • In recent weeks. we believe that the Government must persevere with implementing its fiscal plan. will make it necessary to keep official interest at very low levels for at least another year. and would put the UK on a path of sustainable and affordable recovery. it is critically important that. if the eurozone crisis worsens and causes problems in the UK banking system. it would help create a “leaner and fitter” economy. But the critical priority is to sustain growth while cutting the deficit. Interest Rates & Quantitative Easing • Weak growth prospects. a fiscal stimulus totalling £5-6bn would be consistent with maintaining strong UK market credibility. within Plan A. The chancellor will have to be very cautious. But we think it is unlikely. the Government should act more forcefully to reallocate priorities towards growth-enhancing policies.5% until the final months of next year. and to 1. both globally and in the UK. The Chancellor can now redeem some of this credit and can afford. an increase in QE may be necessary. to spend more on pro-growth policies. and the longer-term risks of higher inflation cannot be shrugged off indefinitely. rebalancing the economy towards the private sector would improve Britain's productive potential. • An erosion of Britain’s credibility in the financial markets. while adhering to the fiscal envelope of Plan A. • We expect official UK interest rates to remain at 0. would be far more damaging to the economy than any small and temporary benefit to growth that may result from abandoning the deficit cutting programme known as Plan A. • The UK has earned considerable credibility in the financial markets as a result of the forceful fiscal policies the Government pursued since June 2010.25% in Q2 2014. • As long as the Chancellor is committed to implementing his planned spending cuts. and the loss of our AAA credit rating. there have been renewed demands for additional increases in QE. • At the same time. But. • With UK spare capacity remaining ample in the next 12-18 months. The UK structural deficit is still unacceptably high. and strong political demands for relaxing or abandoning austerity policies. and then to increase modestly to 0. • If accompanied by an effective growth strategy. we expect the MPC to maintain the Quantitative Easing (QE) programme at its current level £325 billion at least until Q4 2013. 2 . so as not to put at risk the UK’s strong market credibility. • The benefits of higher QE for the real economy are at best marginal. on balance. and with the eurozone likely to face difficult challenges.75% at the end of 2013. and its elimination must remain a key policy priority in the next few years.

3% 2. But UK GDP growth is set to improve from Q3 2012.2% 4. followed by stronger 1.7% in 2011.4% 1.5% -0.7% -9.1% -2. Many analysts questioned the ONS’ assessment that GDP fell in Q1 2012.7% -1. • Table 1 summarises our forecasts for UK GDP and the main components of demand. averaging 0.2% 2010 2. We are now forecasting minimal UK GDP growth of 0. this pushes the UK economy into technical recession. Employment. due to the additional Bank Holiday for the Diamond Jubilee.5% per quarter until end 2013.8% -5.1% 7.4% -12.6% 1. as inflation falls and the squeeze on living standards eases. and 2) the renewed difficulties facing the eurozone this year.3% 2.5% 4.3% 4.4% -3.3% • The ONS reported that. or even slightly negative.3% quarterly fall in Q1 2012 GDP.1% -13. both rose in Q1. % Change Year on Year GDP Household Consumption General Government Investment of which: Business Investment Exports Imports 2008 -1. UK GDP growth slowed sharply from 2.• QE could be made more effective & helpful for businesses if the MPC would be prepared.4% 8.6% 2. instead of focusing exclusively on gilts. GDP and the main components of demand • • In annual average terms.2% 0. after declining by 0.1% 7.7% 1.1% -1. Most business surveys conveyed a more positive message. • • It is critically important to improve the flow of credit to businesses. But a revision is not imminent.2% 4. GDP recorded a further 0. This means giving serious consideration to the creation of a fully-fledged business bank. Growth in Q2 2012 is likely to be zero.3% in Q4 2011. as part of the programme. • • Year-on-year GDP growth in Q1 2012 was -0. 3 .5% 3.9% 1.9% growth in 2013. In 2014. to 2.2% 2009 -4.1% in 2010 to 0. • • In March 2012.1% in 2012.1% -1.8% in 2013. The MPC also cast doubt on the ONS’ figures for Q1 2012.3% 0.8% 7.6% 2011 0.3% 2014 2.1% 0. • • The OBR predicted a 0.4% 4.6% 1.1% 0.2% 1.3% positive quarterly GDP increase in Q1 2012.6% 5. • The immediate outlook remains highly uncertain.7% -0.3%.3% 3. we predicted GDP growth of 0. and we are therefore using the current ONS figures as the starting point of our new forecast. The main factors accounting for the downward revision in our UK 2012 growth forecast are: 1) The unexpected and questionable 0.3% -1.5% in Q4 2011. Table 1: UK GDP & Main Demand Components. ample excess capacity will make possible a modest rebound in UK growth.2% 1. • Our 2013 GDP forecast is revised up because. particularly viable SMEs. to buy private sector assets.1%.6% in 2012 & 1.6% -4. and the number of hours actually worked.3% quarterly fall in Q1 2012. we are predicting a further upturn in UK GDP growth. down from 0.2% 2012 0.1% 1.6% 2013 1.5% -12. The ONS’ Q1 estimates may be revised up in due course.3% 5.

1. and much reduced manufacturing expansion. UK main sectors . In annual average terms. Exports will grow more rapidly than imports in 2013 & 2014. compared with 2010.7% in 2010 & 2.manufacturing. quarterly growth will be positive from Q2 onwards. service sector growth strengthened marginally in 2011 compared with 2010 Construction output growth dropped from 8. 4 . quarterly growth was zero. • Quarterly manufacturing growth was zero in Q2 2011.1% in 2014. the rebalancing of the UK economy towards net exports will be slow and will face difficult challenges. • • • Most business surveys signalled more positive manufacturing Q1 growth than the ONS.• Household consumption will be subdued in the next few years. While manufacturing output expanded relatively strongly in the early stages of the recovery. growth has weakened markedly since Q1 2011. • Looking ahead.2% in 2010 to 2.2% in 2011. to positive growth of 0. 1. & 2. the ONS estimated a large fall in construction output for Q1 2012. but its relative share of total UK economic output has fallen in recent decades. In 2012. construction output is forecast to grow very slowly in the next 2 years. • Construction output fell very sharply in December 2011. which pushed total industrial production into negative territory.8% in 2011. initially of 3% and subsequently revised to 4. because of the decline in Q1. The manufacturing sector is still benefiting from a relative competitive sterling exchange rate resulting from the large falls in sterling between 2007 and 2009. as the personal sector reduces excessive debt levels. and output fell 0. and will make possible a modest improvement in household consumption . • • However.7% in 2013. in view of the serious problems facing the Eurozone.0% in 2011. • This large Q1 fall in construction output was one of the main reasons for the ONS’ estimate that GDP fell by 0. due to public sector cuts and housing market weakness. • Net exports and business investment will be important main drivers of UK economic growth in the next 2-3 years.3% in 2013. and now accounts for just over 10% of the total. this pushed the UK economy into technical recession. But falling inflation will ease the squeeze on UK disposable incomes. But the moderate full-year expansion in 2011 masks very large quarterly and monthly fluctuations.2% in 2014. manufacturing output rose by 3. and in January & February 2012. largely reflected a sharp fall in construction output growth. services & construction • The marked slowdown in GDP growth in 2011. • But.3% in Q1. 1. Though there was a recovery in March.8% year-on-year. • • The recent recession has accentuated the relative decline in the share of UK manufacturing.from a fall of 1. In Q1 2012.8%. Manufacturing is still a significant sector. • • Our full-year construction output forecasts are: -3.7% in 2012. and was in negative territory in Q3 & Q4 2011.7% in 2012. but annual average growth will be negative.

but there are worrying features. but was 170.3% fall in Q1 GDP reported by the ONS.0% -1. Compared with Q4 2011.8% -0.4% increase in employment and a 0.6% Total Production -2.2% in Q1 2012. • The number of self-employed people increased by 89. employment rose. and 2.7% in 2014.7% in Q1 2011.2% 1. the euro have eroded some of the advantages for UK exporters. The service sector accounts in total for just over 76% of total UK output. • Total actual weekly hours worked in Q1 2012 rose by 0. Quarter-on-quarter growth fell to -0. the highest figure since records began in 1992. of this. to 1. less than estimated by most business surveys.9% 8. Table 2: Manufacturing.3% 2.7% 0. the highest figure since records began in 1992.000 higher than in Q1 2011. The sector has the potential to recover and prosper even if sterling strengthens slightly in the next few years. but the number of full-time workers fell by 13. • Service sector average growth was 1. private sector services account for just over 54% of the total economy. But manufacturing is now productive and well managed. 5 .16 million.2% 2.000. & 2.8% 2013 2. Services & Construction Output. reflecting a 0.7% 1.2% 1.99 million. • The level of unemployment fell by 45.8% in 2012.3% in 2014. • • • Many manufacturing firms have been able to retain their skill bases during the recession.000 in Q1. • • Service sector average growth is forecast at 0.6% -9.4% in Q4 2011 to 8.6% 2012 0. 2. % Change Year-on-Year 2008 Manufacturing Output 2. service output was 1. and rose to only 0. to 7.1% in Q1 2012.4% 2011 2.1% 1. In Q1 2012.0% higher than a year earlier. The number of part-time workers increased by 118.8% 1.0% in 2012.5% Services Output 2009 -9. • The number of people who were working part-time because they could not find a full-time job increased by 73.1% in Q4 2011. it was 7.4% in 2010.1% in 2013.2% 2.000 in Q1 2012. the highest figure since comparable records began in 1992.9%.5% -2. and construction. Table 2 summarises our specific forecasts for manufacturing. to reach 4. and inactivity amongst those aged 16 to 64 fell.000 in Q1.6% in 2011. services. The quarterly increase in employment in Q1 was entirely due to more part-time workers.5% 1.5% increase in the average number of hours worked per week.0% -1.8% Construction Output -2. • • Recent labour market trends have been positive overall. after 1.9% increase in the numbers of hours actually worked in Q1 is difficult to reconcile with the 0.2% -3.6% 2010 3.000 in Q1.1% 2014 2.1% in 2013.• • Recent sterling rises vs. Full-year manufacturing output forecasts are: 0. The jobless rate fell from 8.7% Unemployment and the labour market • The UK labour market strengthened in Q1 2012. unemployment fell.7% 1. 2.0% -13. • The 0.42 million.

Unemployment in the 16-17 & 18-24 age groups • The number of unemployed people aged 16 to 24 fell by 17.2% of the workforce) in Q1 2012. when the workforce was much smaller. particularly the willingness of workers to limit wage increases and even accept wage reductions. • • But the level of UK GDP in Q1 2012 was still 4. • Our new forecast for the 2013 jobless peak is the same as in March. • • The UK labour market is now much more flexible and resilient than in previous recessions.000 greater than in March. • We are also forecasting now that the peak in UK unemployment will be reached in Q3 2013 rather than in Q1 2013.9 million in Q1 2013. it is critically important that we regain these productivity losses. • However. • A temporary decline in productivity is acceptable after a recession. has ensured that falls in employment and rises in unemployment in the recent downturn have been much smaller than in the recession of the early 1990s. If productivity fails to recover.5%.• Our new forecast envisages that total UK unemployment would increase from 2.8 million. a net increase of 275.000 people in full-time education who were looking for work in Q1.000 between Q4 2011 and Q1 2012. as the number of hours worked fell by considerably less than the level of output. and totaled 1.0% lower in Q1 2012 than in Q1 2008. UK productivity per hour worked was 2.3 million recorded Q1 2008. The number of weekly hours actually worked in Q1 2012.000 in the jobless total. lower than the pre-recession peak of 949.9 million (9. But. and this will add to the jobless total at a time when demand will remain weak both domestically and in our main export markets. to 2.4% below its Q1 2008 peak. This means that. in line with international definitions. as predicted in March. and the resulting impact on jobs is still due to be felt. • The larger net increase in unemployment we are now forecasting is due to two main reasons: 1) most of the planned public spending cuts still have to be implemented. because it alleviates human misery and helps businesses to preserve skills. • But the net increase in unemployment we are now predicting is 45. as the economy returns to growth. • • These are very positive developments. was 2. the unemployment figure includes 314. and 2) the falls in productivity seen since 2008 will be partially reversed in the next few years. when we predicted that unemployment would rise in to a peak of 2. when we predicted a net increase of some 230. at 925. • Our new unemployment forecast compares with a jobless peak of just over 3 million (10.7% of the workforce) in the recession of the early 1990s. but they have also created new problems. 6 . This greater flexibility.000 between Q4 2011 and Q1 2013.0% of the workforce) in Q3 2013.625 million (8.02 million. living standards will suffer in the long-term.

and 2.000. • Overall.2% in 2012.3% 4.2% 2. Table 3: UK Annual Inflation. we are now predicting annual CPI inflation at 2. Our CPI inflation forecasts 2012 & 2013 are the same as in March.3% 2014 2.9 million in Q3 2013. though less markedly. % Change Year on Year 2008 CPI 3. The Q4 unemployment rate in this age group was 37.6% In the last 6 months.000 (a jobless rate of 41.6% • The number of unemployed people aged 18 to 24 fell by 12.2% -0.6% in 2014.9% in 2013.000 between Q4 2011 and Q1 2012.0%) in Q3 2013.2%. • With total UK unemployment forecast to increase to 2. to reach a level of 814.0% of the workforce.7% in 2012. annual growth of average earnings has fallen sharply for total pay.2% 2013 1. Unemployment in the 18-24 age group is forecast to total around 850. to reach a level of 206. RPI annual inflation was 3. In average terms. it has also edged down. Our RPI inflation forecasts 2012 & 2013 are also the same as in March. 7 .5% 2010 3. we believe the decline will be less sharp than indicated in the recent Inflation Report. earnings growth is modest and remains much lower than both CPI and RPI inflation. after last year’s VAT increase came out of the 12-month comparison. CPI annual inflation fluctuated but recorded a net fall to 3. We accept the Bank of England’s assessment that inflation is likely to decline further in 2012. Inflation and labour costs • CPI annual inflation has declined markedly from its September 2011 peak of 5. as upward pressures from external costs such as energy & imports diminish.5% in April 2012.3% in 2013. our specific forecast for the 16-17 & 18-24 age groups are as follows: Unemployment in the 16-17 age group is forecast to total around 223. • • • Since January.000 (a jobless rate of 23. for regular pay excluding bonuses.2% in 2014. to reach 21.7% 3. falling to 3. • However. and 2.6% 2011 4.0% in April 2012.9% 2.• The unemployment rate for people aged 16 to 24 fell by 0. 2.0%) in Q3 2013. • Table 3 summarises our specific forecasts for various measures of UK inflation.000 between Q4 2011 and Q1 2012.9% of the economically active population for that age group.0% • 2009 2. 1.6% in January 2012.6% peak in September 2011.6% RPI-All Items 4.2% 2012 2. • The number of unemployed people aged 16-17 fell by 5.000. The Q1 unemployment rate in this age group was 19.3 percentage points between Q4 2011 and Q1 2012. • For annual average RPI inflation we are now predicting 3. or 9.5% 5. and downward pressures on domestically generated inflation from unemployment & spare capacity continue. while we agree with the Bank that inflation is likely to fall further in the next 12-18 months. down from a 5.8%. • • It is doubtful that we will see a prolonged period of below target inflation in 2013.

1% in the three months to February. • But if one allows for the effect of various special factors.9% 11. while the short-term impact of the transfer is very favourable. with the OBR forecasts issued in March 2012. five-year period.1bn in April 2011.5 2009 11. Table 4: Public Sector Net Borrowing (PSNB) – BCC vs.1% of GDP) in the financial year 2009/10 to £124. to £92bn.2% 124.7bn higher than a year ago. OBR Forecasts PSNB-FinYears-%GDP-BCC-May 12 PSNB-FinYears-£bn-BCC-May 12 2008 6.6% in January-March 2012.0 4. compared with a deficit of £9. £1.3% 8.8bn (11. 8 .5 156. that the Government’s will meet its fiscal mandate. • In the three months to March. UK public finances and the balance of payments • Public Sector Net Borrowing (PSNB) excluding the impact of financial interventions.8 2010 9.6bn lower than the OBR’s Budget forecast.3% 98. to reach about 2.1% 9.8% PSNB-FinYears-£bn-OBR-March 12 97. as the future payments to pensioners will exceeds the £28 billion value of the transferred assets. on both the CPI and RPI measures.2% of GDP) in the financial year 2011/12. the same as in the three months to February.7% in Q2 2013 & 3. the PSNB recorded a surplus of £16. plus a share of its pension fund’s assets into the public sector. The supplementary fiscal target requires public sector net debt to fall as a share of GDP between 2014/15 and 2015/16.5bn. an unwelcome deterioration. now 2016/17.3% 75. The large surplus is mainly due to a one-off £28bn transfer of the Royal Mail’s historical pension deficit.0 5.4 2012 6. annual growth in pay (both including and excluding bonuses) will remain for some time well below inflation.0 PSNB-FinYears-%GDP-OBR-March 12 6.0 2013 6. negative PSNB figure indicates surplus • The OBR’s recent forecasts assume. • The annual earnings growth for regular pay (excluding bonuses) for the three months to March 2012 was 1.1% 156.0 92.8 2011 8. but lower for regular pay excluding bonuses.9% 97.3% 5.3% 136. • With wage pressures still subdued. This requires it to balance the cyclically adjusted current budget (CACB) at the end of a rolling.8 136. down from 1. • Table 4 compares the BCC’s PSNB forecasts.8% 82. fell from a peak of £156. • The transfer of the Royal Mail’s pension fund to the public sector is also the main factor that reduces the OBR’s PSNB forecast for 2012/13. However.2% in Q2 2014. • Our forecast assumes that earnings growth for regular pay (excluding bonuses) will edge up very slightly over the next 2 years.0 *Positive PSNB figure indicates deficit. the long-term impact is likely to be negative.4bn (8.• Annual growth in total UK average earnings (including relatively volatile bonuses) was 0.6%.4% 104. earnings growth in the public sector was higher than in the private sector for total pay. the underlying PSNB in April would have been around £4.9% 98.8 126.0 2014 4. • In April 2012. in broad terms.

our PSNB forecasts are £6bn higher than those of the OBR in 2012/13 & 2013/14. a fiscal stimulus totalling £5-6bn would be consistent with maintaining strong UK market credibility. have earned him considerable credibility in the financial markets. • There is also scope for spending increases that would not affect the structural deficit. • The UK current account improved markedly last year. known as Plan A. • The precise scale of any stimulus that can be safely provided is a matter of judgement. the Chancellor can consider increased spending on infrastructure investment.3% -48. • While the quarterly figures will remain volatile. • The UK structural deficit is still unacceptably high.0 2013 -2.9% -29. current balance”. a time-limited cut in NICs or in income tax. broadly according to plan.1% -33. and its elimination must remain a key policy priority. and investment income rose significantly.3 2010 -3. Table 5: UK Balance of Payments on Current Account BofP-CurrentAccount-%GDP-BCC BofP-CurrentAccount-£bn-BCC 2008 -1. • Assuming no additional fiscal stimulus.8 2009 -1.0 2012 -2.0% -34. • Table 5 shows our forecasts for the PSNB and the balance of payments on current account. • As the fiscal mandate relates to “the cyclically adjusted. • As well as using the “automatic stabilisers” when the economy is weaker than predicted. The chancellor will have to be very cautious. But the critical priority is to sustain growth while cutting the deficit. such spending would not affect the current budget deficit.1% -34. to 1.7-2. and meeting the fiscal mandate may take 1 year longer than the OBR predicts. moving in a narrow range of 1.9% in 2011.3% of GDP in 2010.• Our new forecast indicates that the Government will be able to cut its deficit steadily over the next few years. or a temporary increase in capital allowances. • The recent IMF report on the UK economy has reinforced the case for combining adherence to the deficit cutting programme. • Any increase in spending will obviously increase total debt. But the forceful measures adopted by the Chancellor since June 2010.5% -20. with the deficit narrowing from 3. But stabilising net debt is only a supplementary fiscal target.g.3% of GDP.6 2011 -1. But our growth forecasts are lower than those of the OBR. e.0 2014 -2. Delaying its achievement in order boost growth would be justified if persistent stagnation threatens to damage to the economy’s long-term productive potential. so as not to put at risk the UK’s strong market credibility. we expect the UK current account deficit to remain relatively stable in annual terms. The trade deficit fell.4% -19. with new growth-enhancing policies. or structural. • As long as the Chancellor is committed to his planned spending cuts. In general measures that support job creation and enterprise would be preferable to a VAT cut. and £7bn higher in 2014/15. and can also utilise its strong status as a haven in the financial market without endangering its AAA rating. and not to the total deficit.0 9 . the UK can reallocate priorities towards growth-enhancing policies.

to spend more on pro-growth policies. it would help create a “leaner and fitter” economy and would put the UK on a path of sustainable and affordable recovery. and make greater use of the flexibility provided by its fiscal mandate.kern@btinternet. The process of reducing debt levels will be painful & will inevitably result in a prolonged period of relatively low economic growth. and consumer spending was 5. in the short term. Though growth is likely to improve gradually.4% below its Q1 2008 peak. • Our central view is that. rebalancing the economy towards the private sector would improve Britain's productive potential. a fiscal stimulus totalling £5-6bn would be consistent with maintaining strong UK market credibility. the UK economy will continue facing a difficult outlook. E-mail: david. while persevering with the implementation of a tough deficit-cutting programme. • It is critically important that. but our working assumption is that the most acute threats will be contained and a major crisis will be averted. • Debt levels are still too high. Chief Economist at the BCC. • The UK has earned considerable credibility in the financial markets as a result of the forceful fiscal policies the Government pursued since June 2010.0% below its pre-recession peak. UK GDP was 4. • If accompanied by an effective growth strategy. and strengthen gradually from mid-2012 onwards.com 10 . • This is necessary at present. The Chancellor can now redeem some of this credit and can afford. within Plan A. But risks have worsened. because persistent stagnation threatens to damage to the economy’s long-term productive potential.Policy issues • The eurozone’s problems will persist for a considerable period. both globally & in the UK. Contact details: David Kern. • Though UK growth is likely to stay positive. is a major challenge that will require policy changes. in spite of the eurozone situation. • Restoring and sustaining UK growth. the Government should act more forcefully to reallocate priorities towards growth-enhancing policies. while adhering to the fiscal envelope of Plan A. • As long as the Chancellor is committed to his planned spending cuts. with weak growth and rising unemployment. • But. living standards will be under pressure in spite of falling inflation. the UK will be able to achieve a gradual improvement in the pace of growth in 2013 and 2014. and a disorderly euro breakdown is likely to result in much weaker UK growth. In Q1 2012. our forecast indicates that both GDP and consumer spending will only return to their prerecession level in the second half of 2014 or early in 2015.