uk economic outlook - ibr q3 2013

Focus on: UKGrant Thornton International Business Report 2013

120+

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countries where ourAudit, Tax and

2013 forecastGDP growth

in 2014

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operate in financial services

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GDP

6thlargest economyglobally

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hedge funds,

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in 2014

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Auditorsworldwide

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Combined global


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$4.2bn

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hedge funds,

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‘large six’



Over

more than63 million

people

GDP


£1.6trn

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12.9%

10.7%

8.2%

7.7%

7.7%

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120+

15,000

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in 2014

1.4%

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Auditorsworldwide

Economy

Ranked in

Combined global


revenues of$300m


expanded by

in Q2 20130.7%


$4.2bn

More than



hedge funds,

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‘large six’



Over

more than63 million

people

GDP


£1.6trn

54.6% 58.9%

13.7%

5.5%

12.9%

10.7%

8.2%

7.7%

7.7%

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more than63 million

people

GDP£1.6trn

6thhlargest economyglobalglobally

Focus on: UK 2

Introduction

Focus on: UK

The UK is an advanced economy of more than 63m people. In 2012, its GDP was approximately £1.6trn (US$2.5trn), making it the sixth largest economy in the world.

Drawing on data sources such as the Economist Intelligence Unit (EIU), the International Monetary Fund (IMF) and the Grant Thornton International Business Report (IBR), this short report considers the outlook for the economy, including the expectations of 500 businesses interviewed in the UK, and more than 12,500 globally, over the past 12 months.

Scott BarnesCEOGrant Thornton UK LLP

T +44 (0)20 7728 2428E [email protected]

120+

15,000

10.4% growth



in 2014

1.4%

forecast growth6.1%

Auditorsworldwide

Economy

Ranked in

Combined global


revenues of$300m


expanded by

in Q2 20130.7%


$4.2bn

More than



hedge funds,

revenues2012


One of the



‘large six’



Over

more than63 million

people

GDP


£1.6trn

54.6% 58.9%

13.7%

5.5%

12.9%

10.7%

8.2%

7.7%

7.7%

5.8%

7.0%

7.3%

120+

15,000

10.4% growth



in 2014

1.4%

forecast growth6.1%

Auditorsworldwide

Economy

Ranked in

Combined global


revenues of$300m


expanded by

in Q2 20130.7%


$4.2bn

More than



hedge funds,

revenues2012


One of the



‘large six’



Over

more than63 million

people

GDP


£1.6trn

54.6% 58.9%

13.7%

5.5%

12.9%

10.7%

8.2%

7.7%

7.7%

5.8%

7.0%

7.3%

120+

15,000

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in 2014

1.4%

forecast growth6.1%

Auditorsworldwide

Economy

Ranked in

Combined global


revenues of$300m


expanded by

in Q2 20130.7%


$4.2bn

More than



hedge funds,

revenues2012


One of the



‘large six’



Over

more than63 million

people

GDP


£1.6trn

54.6% 58.9%

13.7%

5.5%

12.9%

10.7%

8.2%

7.7%

7.7%

5.8%

7.0%

7.3%

120+

15,000

10.4% growth



in 2014

1.4%

forecast growth6.1%

Auditorsworldwide

Economy

Ranked in

Combined global


revenues of$300m


expanded by

in Q2 20130.7%


$4.2bn

More than



hedge funds,

revenues2012


One of the



‘large six’



Over

more than63 million

people

GDP


£1.6trn

54.6% 58.9%

13.7%

5.5%

12.9%

10.7%

8.2%

7.7%

7.7%

5.8%

7.0%

7.3%

120+

15,000

10.4% growth



in 2014

1.4%

forecast growth6.1%

Auditorsworldwide

Economy

Ranked in

Combined global


revenues of$300m


expanded by

in Q2 20130.7%


$4.2bn

More than



hedge funds,

revenues2012


One of the



‘large six’



Over

more than63 million

people

GDP


£1.6trn

54.6% 58.9%

13.7%

5.5%

12.9%

10.7%

8.2%

7.7%

7.7%

5.8%

7.0%

7.3%

54.6%

13.7%

10.7%

8.2%

5.8%

7.0%

58.9% 5.5%

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7.7%

7.7%

7.3%

Economyexpanded by

in Q2 20130.7%

Focus on: UK 3

The UK economy appears to have turned a corner in recent months. Austerity measures introduced in 2010 to rein in a budget defi cit which had climbed above 12% have weighed on growth, with many businesses and consumers joining the government in deleveraging.

Focus on: UK

However, stronger growth in the first half of this year led forecasts to be revised upwards although the economy still remains around 2.5% smaller thanits 2008 peak. The eurozone and the

• the economy expanded by 0.8% in Q3, up from 0.7% in Q2 - a rise of 1.5% year-on-year

• the third quarter improvement was driven by 0.7% growth in the services sector, which accounts for around 80% of UK GDP, whilst the construction sector expanded by 2.5%

• industrial production rose by 0.6% between the second and third quarters, driven by 0.9% surge in manufacturing activity

• the seasonally adjusted trade deficit stood at £3.3bn (US$5.3bn) in September, with a goods deficit of £9.8bn partly offset by a services surplus of £6.5bn; the trade deficit widened from £5.5bn in Q2 to £9.7bn in Q3

• house prices increased by 3.8% in the year to August, up from 3.3% in the year to July

• the unemployment rate stood at 7.7% in Q3, with the number of unemployed falling by 18,000 to 2.49m.

Key Indicators

EconomyExport destinations (2012)

US

US

Germany

Germany

Netherlands

Netherlands

France

France

Ireland

China

Other

Other

Source: ONS 2013

Import originations (2012)

US remain key export markets but growth in demand for British goods and services is being driven outside of Europe by economies such as China and South Korea.

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120+

15,000

10.4% growth



in 2014

1.4%

forecast growth6.1%

Auditorsworldwide

Economy

Ranked in

Combined global


revenues of$300m


expanded by

in Q2 20130.7%


$4.2bn

More than



hedge funds,

revenues2012


One of the



‘large six’



Over

more than63 million

people

GDP


£1.6trn

54.6% 58.9%

13.7%

5.5%

12.9%

10.7%

8.2%

7.7%

7.7%

5.8%

7.0%

7.3%

120+

15,000

10.4% growth



in 2014

1.4%

forecast growth6.1%

Auditorsworldwide

Economy

Ranked in

Combined global


revenues of$300m


expanded by

in Q2 20130.7%


$4.2bn

More than



hedge funds,

revenues2012


One of the



‘large six’



Over

more than63 million

people

GDP


£1.6trn

54.6% 58.9%

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5.5%

12.9%

10.7%

8.2%

7.7%

7.7%

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7.0%

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1.4%

Focus on: UK 4

Focus on: UK

Growth forecasts for the UK have been revised upwards following a raft of positive data. The economy is now expected to expand by 1.4% in 2013, rising to 1.8% in 2014. Despite fears that rising house prices could lead to another credit bubble, there are encouraging signs that the economy is starting to rebalance away from consumption, with investment and exports playing a greater role.

The end of recession in the eurozone, which accounts for more than 40% of exports, provides further encouragement although UK businesses have diversifi ed away from traditional markets due to regional stagnation in recent years. Exports are expected to climb by 2.0% in 2013, accelerating to 4.3% in 2014. Investment fell by more than 14.0% in 2009 and is not expected to pass its 2008 level until 2016, despite increases of 1.1% and 2.5% in 2013 and 2014 respectively.

Interest rates are likely to remain at record lows for some time with new Bank of England governor, Mark Carney, indicating that a rise in the base rate will not be considered until unemployment falls to 7% as part of his policy of ‘forward guidance’. A sharp rise in infl ation might see the BoE change its approach but prices rises are expected to average 2.7% in the short to medium-term, albeit above the target rate of 2%.

Economic outlook

General government net debt (% GDP)

8985

4850

56

50

8387

62

Source: IMF (2013)

2013

Germany

2008

France

2018

UK

The budget defi cit is expected to decline over the next few years, although not as quickly as forecast at the beginning of the present parliament, suggesting the government’s fi scal austerity programme has some way to run. The defi cit is expected to fall to 7.6% in 2013 and again to 6.4% in 2014, reaching 5.1% in 2017 but still well above the EU target of 3%. And public debt continues to rise, climbing to 85% of GDP in 2013 and 88% in 2014, before peaking at 91% in 2016.

The labour market remains complex. Real wages remain around 9% below 2008 levels but private sector employment has actually risen over the same period, suggesting that productivity has declined. Whether existing workers, and those expected to move into jobs as the unemployment rate falls from 7.7% in 2013 to 7.3% in 2014, can be used more effectively, will shape the UK’s growth trajectory.

Shortage of

businesses

finance affecting

15%of UK

23%of UKbusinesses

exportsexpect to increase

Shortage of

businesses

finance affecting

15%of UK

23%of UKbusinesses


Focus on: UK 5

Business growth prospectsFollowing the dramatic rise seen in Q2, business optimism in the outlook for the UK economy jumped again in Q3 following eight straight previous quarters stuck below zero (i.e. net pessimism). The net 76% fi gure is an IBR record-high for the UK and makes the business community the third most optimistic in the 45-economy survey. Business leaders in the UK are now more optimistic than peers in Germany (51%), Sweden (48%) and France (-17%), although all showed improvements over the past three months.

Focus on: UK

Net percentage of businesses optimistic for the economic outlook (next 12 months)

Net percentage of businesses expecting to see profi ts rise (next 12 months)

10%

-30%

20%

-20%

30%

-10%

50%

40%

2008 2009 2010 2011 2012 20132007

60%

70%

80%

Source: Grant Thornton IBR 2013 Source: Grant Thornton IBR 2013

As confi dent executives are more likely to take risks and invest, it follows that UK business leaders are also increasingly bullish about the growth of their own operations. In 2013, on average net 49% of UK businesses expect to increase profi tability, up from just 29% in 2011. Peers in Sweden (40%), Germany (30%) and France (19%) are far less optimistic. The UK fi gure is still some way below pre-crisis levels but continues a steady improvement over the last couple of years. The same is true as far as job creation is concerned: net 31% of UK businesses expect to expand their workforces in 2013, down from 37% in 2008, but up on the 18% recorded in 2011 and ahead of German (15%), Swedish (14%) and French (6%) peers.

UK

Sweden

Germany

France

UK

SwedenGermany

France

Q22012

Q42011

Q32012

Q12013

Q12012

Q42012

Q22013

Q22013

20%

30%

40%

50%

60%

70%

80%

10%

0%

0%-20%

-10%

-30%

-40%

-50%

Shortage of

businesses

finance affecting

15%of UK

23%of UKbusinesses


France

Germany

Sweden

UK

SpainItaly

Shortage of

businesses

finance affecting

15%of UK France

Germany

Sweden

UKUK

SpainItalyItaly

Focus on: UK 6

Focus on: UK

Growth constaintsA lack of demand shot to the top of UK business leaders’ concerns during the fi nancial crisis, peaking at 44% in 2009, albeit slightly lower than peers in France, Germany and Sweden. Since then there has been a gradual easing of demand conditions, with 24% of UK businesses citing a shortage of orders as a growth constraint in 2013, level with peers in Sweden. A lack of demand is still more of a concern for UK businesses than their German counterparts, but business leaders in Germany have seen the issue rise over the past 24 months, after an initial steep decline in 2010 following the fi nancial crisis.

The issue of fi nance has been in the headlines with the government pushing schemes such as ‘Funding for lending’. The IBR results suggest that access to fi nance is far from the biggest concern businesses are facing; indeed just 15% of UK business leaders expect a shortage

Percentage of businesses citing demand as a constraint on their growth plans

of fi nance to constrain their ability to grow their business over the next 12 months. This is only marginally above levels seen in 2007-8 (11%).

Before the crisis, a lack of skilled workers was a drag on expansion plans for around a third of UK businesses. This has fallen to less than a fi fth today, around half the level in Germany which has much lower unemployment.

Source: Grant Thornton IBR 2013

38%

49%54%

18%

58%

58%70%

51%

44%

49% 24%

24%

20092013

Shortage of

businesses

finance affecting

15%of UK

23%of UKbusinesses


Shortage of

businesses

finance affecting

15%of UK

23%of UKbusinesses


Shortage of

businesses

finance affecting

15%of UK

23%of UKbusinesses


2008

2008

2008

2008

23

41

21

30

10

24

15

23%of UKbusinesses


2008

2008

2008

2008

23

41

21

30

10

24

15

Focus on: UK 7

Focus on: UK

Net percentage of businesses expecting to increase investmentin plant and machinery (next 12 months)

Net percentage of businesses expecting to see exports rise (next 12 months)

Commentators and politicians have stressed the need for the UK economy to rebalance its economy away from consumption, towards exports and investment – interestingly, the exact opposite of what the new leadership in China is trying to do.

The view from business leaders in this regard is positive. Net 40% expect to increase investment over the next 12 months, which continues a steady rise from 2009 to bring expectations back to parity with pre-crisis levels. Even German (37%) business leaders are less optimistic in this regard.

The proportion of UK businesses expecting to increase exports has actually risen past pre-crisis levels indicating that they have been able to expand their horizons beyond the troubled eurozone. Net 23% of UK business leaders expect to increase exports over the next 12 months, up from 15% in 2008. Businesses in Germany (21%), France (15%) and Sweden (10%) are less hopeful.

However, the UK has some way to go before it can compete with the German export machine, which ran the largest absolute trade surplus in the world in 2012. Tellingly, Germany tripled the proportion of exports going to the BRIC economies between 2000 and 2012 to 11.7%, a fi gure forecast to more than double by the end of this decade. By contrast just 5.6% of UK exports went to the BRICs in 2012, although this was up from 3.3% in 2007.

Rebalancing the UK economy

2008 200820082008 2013 201320132013

2013

2013

2013

2013

Source: Grant Thornton IBR 2013

There is also room for improvement in terms of international presence. Just 29% of UK businesses have operations abroad, lower than rates in Germany (46%), France (35%) and Sweden (33%). More encouragingly, the proportion planning new or further international expansion was higher than France and Sweden, with traditional markets such Western Europe (57%) and North America (43%) joined by emerging ones, such as the China (37%), the Middle East (32%) and India (30%), high on the list of targeted destinations.

37 40

51

37

15

43

17

32

23

UK

UK

Sweden

Sweden

Germany

Germany

France

France

© 2013 Grant Thornton International Ltd.

‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to theirclients and/or refers to one or more member firms, as the context requires.

Grant Thornton International Ltd (GTIL) and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provideservices to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions.

www.gti.org

CA1310-03

IBR 2013 methodologyThe Grant Thornton International Business Report (IBR) is the leading mid-market business survey in the world, interviewing approximately 3,300 senior executives every quarter in listed and privately-held businesses all over the world. Launched in 1992 in nine European countries, the report now surveys more than 12,500 businesses leaders in 45 economies on an annual basis, providing insights on the economic and commercial issues affecting companies globally.

The data in this report are drawn from interviews with chief executive officers, managing directors, chairmen and other senior decision-makers from all industry sectors in businesses with 100-499 employees.

Q3 data is drawn from 3,300 interviews globally (125 in the UK; 100 in Germany; 150 in Sweden; 75 in France) conducted in September 2013. 2013 data is drawn from over 12,500 interviews (500 in the UK, 400 in Germany, 600 in Sweden; 300 in France) conducted between November 2012 and September 2013.

To find out more about IBR, please visit: www.internationalbusinessreport.com.

Dominic KingGrant Thornton International LtdGlobal research managerT +44 (0)207 391 9537E [email protected]

Wendy WatherstonGrant Thornton UK LLPHead of PR T +44 (0)20 7728 2309E [email protected]

uk economic outlook - ibr q3 2013

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