DANIEL LEEOCTOBER 2015

BSB 2015 CONFERENCE

THE CURRENT UK ECONOMIC CLIMATE FOR BUSINESS

UK RECOVERY CONTINUING IN A TRICKY GLOBAL CLIMATE

After a slow start, the UK is finally enjoying steady growth…

● But income per person has only just surpassed its level in 2007

2007 2008 2009 2010 2011 2012 2013 2014

90

92

94

96

98

100

102

104

106

108

UK GDP total and per capita

Total GDP GDP per capita2008Q1 = 100

…against a tricky global backdrop

Ghost cities in China - Queues for the ATM in Greece

What does this mean for the UK?Good news - lower commodity prices

20

40

60

80

100

120

140

Global commodity prices (S&P GSCI indices)

Energy Food/agricultureJan 2011 = 100

…Bad news - trade and manufacturing haven’t contributed much to the recovery

Trans

port

equip

men

t

Baker

y & fa

rinac

eous

All foo

d, d

rink

& toba

cco

Other

All man

ufac

turin

g

Chem

icals

Rubbe

r & p

lastic

s

Compu

ting

& elec

tronic

s

Met

als

Textile

s

Electri

cal g

oods

Mac

hiner

y

Printin

g, p

aper

& w

ood

Pharm

aceu

ticals

Coke

& pet

roleu

m

-30

-20

-10

0

10

20

30

40

50

Growth in UK manufacturing sectors since Jan 2008 (%)

Honourable exception!

UK DOMESTIC AND CONSUMER RECOVERY LOOKS MORE ROBUST

Feedback to surveys & our Trades Association Council positive in consumer-facing sectors

UK consumer demand still looks strong

● “Barring any shocks, there is no reason why the consumer recovery should stall” (BRC)

● “boost from lower inflation to motorists… is clearly raiing their ability and confidence to spend” (SMMT)

Transport also upbeat

● “On balance, 25% of members expect the UK economy to improve in the next six months” (BVRLA)

● “Members.. Anticipate the strong positive growth in activity levels to continue in Q3 2015” (FTA)

Financial services strengthening

● “noticeable pick-up in activity in recent months” (CML)

● “definitely an increase in merger and acquisitions activity” (BIBA)

Mixed feedback from export-orientated manufacturing

● “The outlook for food and drink manufacturers sounds positive” (Food & Drink Fed)

● “UK apparent demand… in the second quarter of this year has been disappointing” (UK Steel)

● “Significant weaknesses in the machinery industry for reasons that we can’t entirely explain” (MTA)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-100

-80

-60

-40

-20

0

20

40

60

80

CBI surveys: Are you more, or less, op-timistic than you were three months ago

about the overall business situation?

ITS (manufacturing) SSS (business services)

SSS (consumer services) DTS (distribution services)

FSS (financial services)

% balance

Signs of life in real wages an encouraging sign for sustainability of consumer spending growth

● Sustainable wage growth crucial now that unemployment is almost back to pre-crisis levels

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

-1

0

1

2

3

4

5

6

Inflation and earnings summary

CPI Core CPI Average regular earnings (3m-ma)% yr/yr

But cheaper energy windfall spent on one-off purchases, while food sector recovery muted…

Jan-

12 Feb Mar Apr

May Ju

n Jul

Aug Sep Oct

Nov Dec

Jan-

13 Feb Mar Apr

May Ju

n JulAug Sep O

ctNov Dec

Jan-

14 Feb Mar Apr

May Ju

n JulAug Sep O

ctNov Dec

Jan-

15 Feb Mar Apr

May Ju

n Jul

Aug

-6

-4

-2

0

2

4

6

8

10

12

14

Growth in retail volumes by sector

Food stores Clothes stores Household goods stores% yr/yr (3m-ma)

… and competition is intense – our surveys suggest price wars have further to go

Jan-14 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-15 Feb Mar Apr May Jun Jul Aug Sep

-30

-20

-10

0

10

20

30

40

50

-17

CBI retail survey: Expected trend in Grocers' selling prices over next three months

% balance (3m-ma)

Main risks to the consumer outlook – productivity/wages and interest rates to rise…

1995

1998

2001

2004

2007

2010

2013

70

75

80

85

90

95

100

105

UK output per hour worked

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Mortgage interest rates

Growth (lhs) Mortgages (outstanding)%

Key business concern: tightening labour market and skills shortages

Many signs of skills shortages emerging and jobs growth slows● “We have seen an end to the run of expansion of employment in our

sector that goes back to the start of our survey in March 2011” (MTA)● “We are therefore continuing to see employment growth within the

finance sector and believe we are moving towards a period of full employment.” (Jersey Finance)

● “Pressure on drivers for many firms is acute” (RHA)● “Skills shortages in our sector remain a threat with demand exceeding

supply for key pinch-point skills.” (CECA)● “a slowdown in employment growth in our sector is expected… Our

sector needs skills that can’t necessarily be taken from the unemployment pool.” (FDF)

● “Wages increases are accelerating and there are many scarcities across the skills set for the sector.” (TechUK)

● “members reported that wages have been the key driver of inflation in the sector” (CPA)

● “Where pay reviews have been conducted in the last quarter, the resulting average (mean) increase in basic pay was 2%” (BPIF)

But pay growth still restrained in many places● “still a tendency to freeze pay for drivers, workshop staff and warehouse

staff.” (FTA)● “There has been an exit of a number of experienced people from our

industry, and recruiting talented people is tough… Wage reviews without merit are a thing of the past so inflationary pay rises are modest” (BIBA)

● “For those companies still expanding and working flat out, settlements are typically 2%... several companies with continued low sales continue to offer no increase, particularly to management staff.” (BCC)

0

10

20

30

40

50

60

Concern among firms about availability of labour

Manufacturing (skilled labour as a constraint on output in the next three months)Services (shortage of professional staff as a constraint on future business)Services (shortage of other staff as a constraint on future business)

% of firms

Summary: households and businesses to drive UK growth – main risks are global

• Slower economic growth in China weighs on other EMs & world growth

• Another downturn in Eurozone fortunes

• Uncertainty ahead of EU referendum weighs on investment

• Productivity recovery fades

• Strong recovery in productivity growth supports earnings growth

2013 2014 2015 2016-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

CBI UK growth forecast

Household spending Government consumption

Fixed investment Inventories

Net trade GDP

Per

cent

age

poin

ts

Daniel LeeSenior economist, CBI

e: daniel.lee@cbi.org.ukt: +44 (0)20 7395 8111

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