business focus 13
Consumers’ spending power comes to the rescue, as recovery takes hold
The UK will return to growth in the second half of the year, saved by consumers’ spending power and a revival on the high street after exports continue to disappoint, according to the latest economic forecast from the Ernst & Young ITEM Club
ITEM Club’s autumn forecast says that ’deeply disappointing’ trade figures have stifled growth over the past six months but falling inflation and rising employment levels have seen consumer demand bounce back stronger than expected. ITEM says these trends will continue to gather pace next year, supported by a resurgence of the housing market.
According to the report GDP will stutter to -0.2% this year overall, before increasing to 1.2% in 2013 and 2.4% in 2014.
Consumer spending props up a weak recovery
Peter Spencer, chief economic adviser to the Ernst & Young ITEM Club, comments: “The UK is relying heavily on the high street to come to the rescue this year. The fundamentals are in place to enable this to happen. Inflation is coming back to heel, private sector employment
is holding up, and the housing market also looks poised for a revival. But it’s not the balanced, long-term sustainable growth we were hoping for.“
ITEM Club says net trade is actually expected to subtract 0.6% from GDP this year, before positively contributing to growth in 2013. In contrast, disposable incomes are forecast to increase by 1% this year and 1.4% in 2013, which feeds through to consumer spending growth of 0.6% and 0.8% respectively.
Chancellor will miss OBR’s deficit reduction targets
That’s where the good news ends. The ITEM Club report says that the UK’s late growth spurt in the second half of the year is unlikely to be enough to enable the Government to meet the Office for Budget Responsibility’s (OBR) deficit forecast of £95 billion for 2012/13.
The ’new global middle class’ screams opportunity
Neil Hutt, Ernst & Young senior partner in Reading: Although there are signs that the UK economy could soon return to growth there is still a huge opportunity for the region’s businesses to secure their long- term futures by looking to the ’new global middle class’.
The middle class in Asia alone currently numbers some 525 million people, greater than the population of the entire European Union, according to Ernst & Young’s ’Innovating for the next three billion’ report. Between now and 2030, an additional three billion people globally will enter this income bracket.
This vast group has considerable spending power. Between 2009 and 2030, demand from the global middle class could grow from $21 trillion to $56t.
Against a backdrop of sluggish growth in developed markets, this rise in private consumption among the middle class, particularly in rapid-growth markets, should help to balance the global economy
THE BUSINESS MAGAZINE – THAMES VALLEY – NOVEMBER 2012
and create a vital new revenue stream for companies across a wide range of sectors.
Capitalising on demand from the next three billion won’t be straightforward. In the past, developed world companies would typically take premium products that sold well in their home market and either sell them unchanged in rapid-growth markets or stripped them down to make them more affordable. Neither approach was entirely satisfactory.
To reach the next three billion therefore, companies will need to understand the otherwise unsatisfied demand of the new middle income customers to create entirely new products and services to fulfil them. This may mean thinking differently about every stage in the product development process.
Those that can sustain both long- term commitment and the ability to innovate for the next three billion will be well positioned as this market swells in the next 20 years.
www.businessmag.co.uk
ITEM Club expects both the Public Sector Current Budget (PSCBX) and Public Sector Net Borrowing (PSNBX) to overshoot by around £8b.
Spencer comments: “Public finances have been hit with a pincer movement of higher spending and lower tax receipts, which is causing the UK to slip against the OBR’s deficit forecast. We think this is largely cyclical but the OBR may view this deterioration as structural and suggest that further policy tightening is necessary after the election if the chancellor is to meet his fiscal targets.“
Risks dominate the outlook
Concluding Spencer says: “Consumers may be propping up a weak recovery this year but the move towards balanced growth over the medium term hangs critically upon a recovery in world markets.
“However, even if the US negotiates the impending fiscal cliff and euro policymakers actually do what it takes to save the single currency, these markets will still be held back by austerity and retrenchment. A lot still hangs in the balance and risks dominate the outlook.“
Neil Hutt
Details: Neil Hutt, senior partner for Reading 0118-9281599
Julian Gray, senior partner for Southampton 023-8038-2100
www.ey.com/uk
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