UK Monthly Economic Review

April 2013
(Based on March 2013 data releases)

Monthly headlines: OBR slashes over optimistic GDP forecast and says Budget 2013 unlikely to impact growth UK may avoid a new technical recession, but the risks are finely balanced Latest BCC QES and some external data paints a relatively upbeat picture for Q1
OBR confirms a weaker economic outlook... The Office for Budget Responsibility (OBR) have once again downgraded their outlook for the UK economy. The OBR halved its GDP forecast for 2013 to 0.6%, and this is now identical to our own growth forecast (see table 1). The OBR also confirmed that the job of restoring stability to the public finances will take longer than they had predicted in December. Public sector debt as a percentage of GDP will now only start declining in 2017/18 (see chart 1). ...and says Budget unlikely to impact growth Last months Budget did produce some headlinegrabbing measures designed to boost growth in key areas of the economy, including cutting corporation
%
83 78 73 68 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 OBR December 2012 OBR March 2013 Source: OBR

Table1: Latest BCC and OBR GDP forecasts

BCC (%) 2013 2014 2015 0.6 1.7 2.2

OBR (%) 0.6 1.8 2.3

Difference (%) 0.0 -0.1 -0.1

Sources: BCC, OBR

88

Chart 1: OBR forecasts of public sector debt as a percentage of GDP

tax, increased infrastructure spending, and measures to support the housing market. The Chancellor also announced a broader remit for the Bank of England to include supporting growth. However, as the OBR point out, the Chancellors giveaways were offset by his takeaways and therefore the Budget is expected to have no impact on economic growth. UK could avoid a new recession Recent economic data provides hope that the UK economy grew in Q1 2013. Output from the service

30 25 % balance 20 15 10 5 0 Feb-12

Chart 2: UK services sector

2.0 1.5 1.0 0.0 -0.5 -1.0 -1.5 -2.0 % change 0.5

sector, which accounts for over three-quarters of UK economic output rose by 0.3% in January (see chart 2), the fastest rate for five months. Retail sales also rose by 2.1% in February. The latest BCC Quarterly Economic Survey (QES) also supports an upbeat picture for growth, with the national domestic and export balances in both manufacturing and services rising in the first quarter (see charts 2 and 3).

Apr-12

May-12

Aug-12

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Jun-12

Jul-12

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Jan-12

Dec-12

QES Services home orders (LHS) ONS Service sector output (RHS)

QES Services export orders (LHS) Source: BCC, ONS

08/04/2013

UK Economic Briefing

Oct-12

Jan-13 PAGE 1 OF 4

although it is likely to be a close call Significant downward pressures on the UK economy continue to emanate from the manufacturing and construction sectors. Construction output in January 2013 was down 7.9% on January 2012. Output from the manufacturing sector fell by 3.0% over the same period. However, the latest BCC QES paints a more optimistic picture with increases in both the domestic and export balances for manufacturing firms in Q1 2013 (see chart 3). Our view is that the UK economy will grow by 0.1% in Q1 2013, thereby avoiding a new recession. Nonetheless, growth will still be exceptionally weak by historic standards. UK employment remains strong for now In the three months to January, employment increased by 131,000 to reach 29.73 million. The
Annual change (000s) % balance

30 25 20 15 10 5 0

Chart 3: UK manufacturing sector

4.0 3.0 2.0 % change 1.0 0.0 -1.0 -2.0

Mar-12

Aug-12

Jan-12

Oct-12

Nov-12

May-12

-5 -10

Dec-12

Feb-12

Apr-12

Sep-12

Jun-12

Jan-13

Jul-12

-3.0 -4.0

QES home orders (LHS) ONS Manufacturing output (RHS)

QES export orders (LHS)

Source: BCC, ONS

1000

Chart 4: UK employment

+number of private sector jobs rose by 904,000 over the past year, more than offsetting a 313,000 fall in public sector employment (see chart 4). However, there are early signs that the strength of UK jobs market may be fading, with unemployment rising between November and January, the first increase in a year. The latest BCC QES also points to a more mixed picture with a slight weakening in the jobs balances, although they remain in positive territory. ...but inflation remains an issue CPI inflation rose to 2.8% in February, the first increase since October 2012 (see chart 5). The largest upward pressure came from gas and electricity bills, which were partly offset by weak price rises in food and soft drinks. Looking forward, there is uncertainty over the near-term outlook for som inflation. Along with expected food price rises, the weakness in sterling may increase the upward pressure on inflation. A more positive signal is that the latest BCC QES revealed that intentions to raise prices among businesses had weakened.

500

0 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 Public sector Private sector Source: ONS

-500

-1000

-1500

6.0% Annual inflation rate 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Chart 5: CPI inflation

2013 JAN 2012 SEP 2012 MAY 2012 JAN 2011 SEP 2011 MAY 2011 JAN 2010 SEP 2010 MAY 2010 JAN 2009 SEP 2009 MAY 2009 JAN 2008 SEP 2008 MAY 2008 JAN 2007 SEP 2007 MAY 2007 JAN
Source: ONS

08/04/2013

UK Economic Briefing

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UK current account position at 23-year low... The latest balance of payments figures revealed that the UK ran a current account deficit (the gap between what we earned from other countries and what we spent) of 58 billion in 2012, up from 20 billion in 2011. The current account deficit in 2012 was equivalent to 3.7% of GDP, the highest deficit as a share of our economy since 1989 (see chart 6). Weak trade performance and lower income from UK's foreign direct investments have driven the fall. These figures highlight the major challenge that the UK economy faces as it tries to rebalance towards exports. ...while there is hope of an export led recovery... The Q1 2013 QES revealed an improvement in the national export balances (see chart 7). Service firms performed particularly well with the export balances for
% Balance

5.0

Chart 6: UK current account position

3.0

1.0 1982 1984 1986 1988 1990 1992 1994 1996 1998

2000

2002

2004

2006

2008

2010

2012

% -1.0 -3.0

-5.0

UK current account as % of GDP Source: ONS

-7.0

50 40 30 20 10 0

Chart 7: UK Export Orders

the sector reaching their highest level since 1994. The strength of the export balances, confirms the huge untapped potential among businesses to drive an export led rebalancing of the UK economy. The UK's trade deficit narrowed in January to 2.4 billion, from (a downwardly revised) 2.8 billion in December. However, the UK's trade position still remains weak. ...the Eurozone continues to struggle The Eurozone, one of the UK's major trading partners, continues to struggle. The rate of unemployment in the Eurozone reached 12% in February 2013, the highest rate since the single currency was launched in 1999. According to the latest available figures, the highest jobless rate in the Eurozone was 26.4% in Greece, followed by 26.3% in Spain and 17.5% in Portugal (see chart 8). The latest jobs figures, along with the problems in Cyprus provide further evidence of the significant weakness in the Eurozone economy.

-10 -20 -30 -40

30 Unemployment rate % 25 20 15 10 5 0

Bottom line: Overall, March's data releases as well as the QES, supports our view that the outlook for the UK economy will improve gradually over the coming months, and that growth will be positive but subdued. However, even if we avoid a new technical recession, economic growth is likely to remain weak for some time without bold and radical measures to support enterprise and wealth creation.
For more information please contact: Suren Thiru, UK Economic Advisor. Email: s.thiru@britishchambers.org.uk

. For more 08/04/2013 information please contact: Suren Thiru,UK UK Economic Advisor. Email: s.thiru@britishchambers.org.uk Economic Briefing PAGE 3 OF 4

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Manufacturing export orders Service export orders Source: BCC

Chart 8: UK and Euro area unemployment

Greece Spain Portugal Slovakia Ireland Cyprus Euro area Italy France Estonia Slovenia Finland Belgium UK Malta Netherlands Luxembourg Germany Austria Source: Eurostat, ONS

Chart 8: UK economic summary*, April 2013 (Based on March 2013 data releases)
Deteriorating
Sector Household Indictors (sources) Retail Sales (ONS) Consumer Confidence (GfK NOP) House Prices (Halifax) New car sales (SMMT)** Mortgage approvals (Bank of England) Business confidence (BCC)*** Business lending (Bank of England) Service sector output (ONS) Production output (ONS) Investment intentions (Bank of England)** Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12

No change
Nov-12 Dec-12

Improving
Jan-13 Feb-13

Business

Labour market Employment (ONS) Unemployment (ONS) Claimant count (ONS) Earnings (ONS) Economic Activity (ONS) Financial FTSE100 (Bank of England) Wholesale funding (Bank of England) Retail funding (Bank of England) Oil prices (Bank of England) Gold prices (Bank of England) 10 year Government bonds (Bloomberg) Public sector net borrowing (ONS) Public sector net debt (ONS) Tax receipts (ONS) Current Budget (ONS) UK trade balance (ONS) Exchange rate (Bank of England) Eurozone GDP (Eurostat)**** Export deliveries (BCC)*** Export orders (BCC)***

Government

External

*Colours indicate an improvement or deteriorating of each indicator and refer to monthly changes unless stated. For example, an improvement in employment refers to an increase, while an improvement in unemployment refers to a fall. **Annual changes. ***Quarterly changes. ****Latest figures are estimates. 08/04/2013 UK Economic Briefing PAGE 4 OF 4