Business Forecasts Northwest December 2005
Produced by
The Regional Economic Forecasting Panel on behalf of the
Regional Intelligence Unit.
www.nwriu.co.uk
This report is published by the Northwest Development Agency as part of its continuing commitment to inform the economic development of England’s Northwest. It has been produced by SQW Ltd and Cambridge Econometrics Ltd, economic development and forecasting consultancies, on behalf of the Northwest Regional Economic Forecasting Panel. Whilst every effort has been made to ensure the accuracy of the material in this report neither the Panel, SQW Ltd, Cambridge Econometrics Ltd nor the NWDA Research Team can accept any responsibility for decisions based on the material that follows.
Further Information If you require further information on the work of the Panel, please contact Emma Ibberson. Press enquiries should be addressed to Rachel Ormandy. Emma Ibberson
Rachel Ormandy
Economic Information Analyst
Senior Press Officer
Research Team, NWDA
NWDA
Emma.Ibberson@nwda.co.uk
Rachel.Ormandy@nwda.co.uk
01925 400290
01925 400237
Foreword Like the UK, the Northwest economy has seen a quite
Our view now, as in May, is that each element in this
marked slowdown in growth this year. Cyclical recovery
favourable coincidence will have less impact from now on,
is expected during 2006, if at a somewhat slower rate
such that at least some underperformance relative to the
than in the UK as a whole.
UK will emerge again. That said, there may be some signs
The main feature of our new business forecast is a quite marked cyclical slowdown, now well underway in the Northwest, as in the UK. This will be followed by some
of underlying improvement because the growth gap we are forecasting in the recovery period is narrower than in the 1990s.
recovery in the rate of output growth during the course of
It is also possible to address relative performance in a
2006, with faster growth thereafter.
framework of longer-term analysis, a challenge to which we
Our May 2005 forecast anticipated a mild and gradual cyclical slowdown, subject to the risk of a more rapid slowdown in consumer spending. This happened in the region, as in the UK. In addition, data revisions since the Spring now show that the slowdown in the UK had already
shall return at our next meeting late in January. Then we shall take another look at prospects in the region relative to the UK over the next twenty years, this time concentrating particularly on the likely contribution of city regions in the Northwest and relative to those elsewhere in the UK.
begun before the end of last year, not that activity was
We have again provided an Executive Briefing in this
holding up, as previously implied. The added impact of
edition of Business Forecasts Northwest. This is designed
Hurricane Katrina on oil and other energy prices has
to be free standing so that readers can treat it as a
affected the picture. However, while this edition of Business
summary and introduction to our forecasts, or download it
Forecasts Northwest now shows a more marked and
from www.nwriu.co.uk, to forward to colleagues and others
earlier cyclical downturn, we are still forecasting that
to give them the essence of our views.
broadly similar levels of output and employment will be achieved by 2008, so it is mainly the shape of the cycle that has changed.
While the Panel is independent of NWDA, we enjoy the support of the region’s Research Team, based in the Agency. We are grateful to the Team, and especially to their
We continue to be interested in why the Northwest
Economist, Margaret O’Brien, for support, for knowledge
economy has grown more rapidly of late relative to the UK
they contribute, and for publishing our papers. I would like
following a much clearer growth gap through most of the
to pay a particular tribute to Margaret for her contribution,
1990s. Has there been an underlying improvement, or is
since this will be her final edition. We are also grateful to
the apparent improvement, including faster growth than the
Cambridge Econometrics, supported by SQW Ltd, for draft
UK in 2003 and 2004 according to official GVA and
material we have taken account in preparing this forecast.
employment data, more a matter of short term influences? Our analysis still suggests that a favourable coincidence of short-term factors has had a big part to play. These include strong consumption growth influenced by the timing of
We should again be grateful for any comments and suggestions to guide our work. Please address these to emma.ibberson@nwda.co.uk.
house price rises in the region, the impact of the
David Coates
Commonwealth Games on construction, and strong growth
Panel Chariman
in public spending, the share of which has a relatively high weight in total expenditure in the region, which gives it a particularly marked effect.
Executive Briefing David Coates Panel Chairman This briefing brings together the main points in our December 2005 Business Forecasts Northwest which report on recent developments and look out over the next three years. Our full forecast, including this briefing, can be found at www.nwriu.co.uk
NORTHWEST OUTLOOK
The recent strong performance of the Northwest
nearly a fifth of the regional economy, grew very strongly
economy appears to have come to an end. After
at around 8% in the Northwest in 2004. This grouping
outperforming the UK in both years, and growing by
has continued to grow at roughly 4% through 2005, and
2 /2% in 2003 and over 3 /2% in 2004, the Northwest
will remain fairly buoyant until the middle of next year
economy is expected to have grown by a little less than
before responding to the present downturn with a lag.
1
1
Recovery may also be lagged.
3
1 /4% in 2005. The sharp slowdown reflects pressures
that have affected the UK economy as a whole.
After recent buoyancy, consumer oriented services, such
We still expect the Northwest to have grown a little faster
as retailing and hotels & catering have been hit hard as
than the UK in 2005, partly because of differences in
household spending has fallen back. Recovery is likely to be slow because of cautious household spending.
structure, but market intelligence suggests that regional
growth is now slowing as rapidly as in the UK, and we
On sectoral detail, financial and business services, now
The public sector has been another recent source of
anticipate a trough in the present economic cycle
relatively strong growth in the Northwest. With
regionally and nationally fairly early next year.
government spending plans still showing reasonable
Some recovery is then expected during 2006, such that
growth, the sector should continue to grow faster than
regional growth in the year as a whole will be close to
the rest of the regional economy over the next three
that in 2005. Thereafter more rapid recovery in the region
years. Although growth in public spending may have
and in the UK is anticipated, leading to levels of activity
slowed to 21/2% in 2005, and should remain at around
in 2008 close to those we were forecasting in May. In the
this rate to 2008, later in this period and beyond the
Northwest this means growth of around 2 /2% in 2007
region may be adversely affected by a redirection of
and 2008, and our forecasts imply a return to relative
public sector investment to the South East because of
1
the 2012 Olympics.
underperformance in 2006 -2008.
Manufacturing output growth in the Northwest has been
GVA GROWTH IN THE NORTHWEST AND UK
modest in recent years, and increasingly difficult trading
% pa
conditions have been faced in 2005, with rising fuel and
4
commodity prices adding to pressures on costs. The full
3
effects of the increase in fuel prices may not yet have
2
been felt as major energy users have hedging arrangements. As these unwind, such firms will face
1
further cost pressures, limiting their recovery. We also 0 2003
2004
2005
2006 NW
UK
Source: Regional Accounts and Panel Forecasts.
2007
2008
know of a further shift in outsourcing to Eastern Europe. So manufacturing output is expected to fall overall to 1/4% during 2005 with modest growth in 2006 and only somewhat better prospects in 2007 and 2008.
Slower growth in economic activity in 2005 and 2006 will
mean weaker growth in regional employment, albeit with
prices are likely remain a concern making the Bank of
a lag, from over 1% in 2004 to 3/4% in 2005, and to just
England cautious about cutting rates before the more
1
rapid recovery we are now forecasting in this cycle
/4% in 2006, as businesses adjust to weaker growth in
demand.
generates its own inflationary pressures.
Business and public services will continue to provide
of 2005 as domestic demand weakens. Net trade is
with some 24,000 additional jobs expected in business
expected to improve. Growth is expected to recover from
and financial services between 2005 and 2008. The
2006 as consumer spending and the euro-zone
immediate prospects for further expansion in
becomes stronger. Investment growth is expected to
employment in consumer services are not favourable.
slow over 2005-06 as a result of the high oil price and
Following growth here of almost 2 /2% in 2004, weak demand conditions are expected to curb future job
the domestic slowdown, and then to recover.
over 2005-06 as output growth slows. It is expected then
2006. Manufacturing employment is expected to
to pick up slightly over 2007-08 as conditions improve,
continue to contract throughout the forecast period.
notably in business and financial services.
Despite higher oil prices, we accept the consensus view
RISKS TO THE FORECAST
The balance of risks to this forecast remain on the
among economic forecasters that the world economy
downside. Geopolitical developments could impact on oil
will still have grown by 3% in 2005, and that this should
prices and on consumer and business confidence. Oil
continue over the next three years. There have been
prices could anyway rise further, feeding into input price
some changes within the overall picture. The outlook for
inflation which, if fast enough, could lead to a rise in
Japan has improved through 2005 partly because of
interest rates, with consequential effects on consumer
exports to China, but euro-zone prospects have eased
spending and investment. Weak demand from the euro-
with weak industrial confidence.
zone remains a concern for UK exports and there is a risk
Oil prices have risen further through 2005, initially due to
that the recovery expected in these economies will be
market speculation, then in response to the impact of Hurricane Katrina. There appears to be little prospect of
UK employment is expected to grow by less than 1/2% pa
growth in these services to 1/4-1/2% pa in both 2005 and
WORLD AND UK BACKGROUND
UK GDP growth is expected to be weak in the remainder
most of the region’s new jobs over the period to 2008,
1
Inflationary pressures from world oil and commodity
delayed or fail to occur.
Consumer spending might undergo an even sharper, or
much reduction through 2006. The prices of many non-
more sustained, correction than is now anticipated due,
oil commodities are expected to increase through the
perhaps, to a stronger slowdown in the housing market.
forecast period, particularly in response to demand from
However, to date the volume of retail sales has not
China, but at a slower rate than in recent years.
collapsed, and the risk of a further marked correction is
UK GDP growth began to weaken in 2004 as consumers reined in spending. The slowdown continued into 2005
looking less likely.
Finally, a more marked domestic slowdown could result
and GDP growth weakened to less than 1/2% quarter-on-
in a worsening of the government’s financial position to
quarter in the first half of the year. While the trade
the point that tax rises are required. This could put further
performance has been mixed, UK manufacturing output
pressure on the expected recovery in consumer
fell in both of the first two quarters of 2005.
spending and possibly also on company investment.
Contents Foreword Executive Briefing The World Economy
1
The UK Economy
3
BUSINESS FORECASTS NORTHWEST Northwest Economy Outlook
5
Northwest and UK GDP
7
Sector Output
8
Expenditure
12
Labour Markets
14
Prices and Earnings
17
Construction and Housing
19
The World Economy KEY POINTS
After slowing at the end of 2004, growth in Japan has
Since our May forecast, the oil price has risen further,
picked up in 2005 as consumer spending has recovered,
partly as a result of the impact of Hurricane Katrina. Short-
making up for the slowdown in trade. Employment growth in
term expectations for future oil prices have been adjusted
2005 is likely to be twice the rate seen in 2004 and this is
accordingly, with little prospect of much reduction in 2006.
leading to increased optimism among consumers.
Despite this, expectations for world growth in total have
Manufacturing growth is also on an upward path, and
not changed much since the Spring, as expectations for
investment plans are being upgraded with strong machinery
growth in Japan have strengthened while those for growth
orders. The forecast for Japanese growth in 2005 has been
in the euro-zone have weakened; in each case, a change
upgraded to 2%. Moreover, rather than fall away as in
in outlook for consumer spending is the primary cause.
previous recoveries, this rate is expected to be maintained
World GDP is expected to register growth of 3% for 2005,
in 2006.
1
with the US expected to grow at 3 /2% in spite of the impact of rising energy costs on consumers. World GDP is also expected to continue to grow at 3% a year between 2006-08.
EU industrial confidence remains weak, but has not deteriorated further over the past six months. Non-oil commodity prices, and notably the prices of metals, have generally risen also as demand from China has continued to grow rapidly, but some have recently fallen back to January levels.
Consensus forecasts for euro-zone growth in 2005 and 2006 have been revised down during 2005 in light of the faltering recovery and the impact of high oil prices on inflation and growth prospects. Domestic demand has failed to pick up, especially in Germany and Italy, with labour demand still weak and an unemployment rate still in the region of 9%. In France there was a sharper than expected contraction in household consumption in 2005Q2, with a decline in business investment also. In Germany, with consumer spending falling in the first two quarters of 2005,
EXPECTATIONS FOR WORLD GROWTH HAVE NOT
the continued growth of exports continues to support the
WEAKENED
economy. Consensus forecasts have euro-zone growth at
Expectations for world growth in the short term do not
11/4% in 2005 and 13/4% in 2006.
appear to have weakened, despite the higher oil price: growth is still expected to average 3% for 2005. The forecast
CHART 1: PROSPECTS FOR GROWTH IN THE WORLD ECONOMY
for Japan has improved but that for the euro-zone has worsened a little.
% pa 5
Data show US GDP growth running at 31/2% year-on-year in the first two quarters of 2005. Following Hurricane Katrina, oil prices rose to almost $70 pb by early September before dropping a little to the low $60s by end-October, but the consensus forecast for US growth remains 31/2% in 2005 and 31/4% in 2006. Businesses and consumers are expected to be hit by falling petrol supplies and rising energy costs. As a result, consumer spending growth is
4 3 2 1 0 2003Q1
2004Q1
2005Q1 US
Japan
Eurozone
2006Q1 UK
Source: OECD Economic Outlook, Consensus Forecasts (Sept 2005).
expected to weaken in 2005H2 before recovering in late 2006, while inflation is expected to pick up to 31/2% in late 2005 and early 2006.
1
THE DOLLAR HAS STRENGTHENED FOR THE MOMENT
in October. In contrast, the other major metals are trading
Over 2005, the dollar has strengthened against both
broadly at or below their January prices. Similarly, cocoa
sterling and the euro as the Federal Reserve has raised
and coffee prices rose in the first half of 2005, but are now
interest rates while euro-zone rates have remained
trading close to or just below their January price. The
unchanged. The UK base-rate was left unchanged until
forecast is for non-oil commodity prices to continue to grow
1
August, when the Bank of England cut it to 4 /2%,
strongly, but by less than in 2004. Metals and minerals
suggesting that UK rates may have peaked. Despite
price inflation is expected to average about 14% pa over
sluggish prospects, there may be some signs that euro-
2005-06.
zone rates may begin to rise above 2% on fears of inflation because of higher oil prices, perhaps with a temptation to follow the US where the forecast is for further rises in US interest rates. However, the dollar is not expected to strengthen much further against the euro and sterling over 2005-07.
at the start of 2005 to about $55 pb at Easter. By September, supply concerns and Hurricane Katrina had helped lift it to more than $70 pb. In the UK, this has been reflected in input price inflation, which remains above 10% year-on-year. This does not appear to have adversely
NON-OIL COMMODITY PRICES APPEAR TO BE
affected industrial confidence in the EU: the European
FALLING BACK
Commission’s indicator shows that industrial confidence
Among non-oil commodities, the outturns for metal prices
across the euro-zone has actually improved since May,
have been mixed. The price of copper has continued to
although it does remain negative. EU consumer
rise throughout 2005 to hit new highs in October. The price
confidence, however, has continued to weaken.
of zinc has fluctuated during 2005, but it too hit a new high
2
Speculation drove the price of Brent crude up from $40 pb
The UK Economy KEY POINTS
In the first half of 2005, GDP growth averaged less than
UK GDP growth slowed to less than /2% quarter-on-
1
quarter in 2005H1, continuing the trend seen at the end
forecast for 2005 as a whole, the rate of growth in earlier
of 2004, as consumers reined-in spending. While the
quarters was also cut. Consumer spending has slowed
trade performance has been mixed, manufacturing
down as the housing market has weakened and as higher
output fell in both of the first two quarters.
interest rates have started to bite. However, there is no
Inflationary pressure from world commodity prices
evidence to date of a rapid contraction. Exports and
remains a concern, although the Bank of England has cut
imports both fell in the first quarter before posting a strong
rates in response to the wider economic slowdown. But
recovery in the second quarter. Along with growth in
concern about the inflationary effect of high oil prices
investment and government expenditure, growth in trade is
suggests that the Bank will be cautious about cutting
below what we were expecting in the Spring. We now
rates further.
expect GDP growth in 2005 to amount to just 11/2%.
1
/2% quarter-on-quarter, and, more importantly for the
GDP growth is expected to slow over the rest of 2005 as domestic demand weakens. Net trade is likely to record
UK GROWTH IS EXPECTED TO WEAKEN IN LINE WITH
an improvement. From 2006 GDP growth should recover
DOMESTIC DEMAND
as growth in consumer spending and the euro-zone
In January 2005, the consensus was for GDP growth of
improves. Export growth is expected to accelerate over
21/2%. This remained the view until July, by which time the
2005-08 as world growth remains robust at 3% pa, while
extent of the slowdown in consumer spending had become
slower growth in investment is forecast over 2005-08 as
clear and oil prices had hit new highs. In light of this, and
a result of the high oil price and the domestic slowdown.
the effect on confidence of the London bombings, the
Employment is expected to grow by less than 1/2% pa
mean forecast for 2005 was revised down to 2%. We
over 2005-06 as output growth slows. It is expected to
expect this consensus view to be revised downwards
pick up slightly over 2007-08 as conditions improve.
further as account is taken of the latest data.
UK GROWTH HAS SLOWED IN 2005 The slowdown in GDP growth towards the end of 2004 continued into 2005 and GDP growth in the first quarter was just 1/4%. In March 2005, we were expecting GDP growth to slow to 21/2% in 2005 as higher input costs and the slowdown in consumer spending took effect. Growth in investment and government consumption was forecast to moderate. Our forecast included a slight improvement in net trade with a small pick-up in export growth to 31/2%.
We expect some recovery in GDP growth in 2006, and thereafter that growth will pick up over 2007-08 to 23/4% pa as consumer spending growth picks up and export growth continues to accelerate. Government expenditure and investment growth are expected to weaken further over this period. CHART 2: OUTPUT AND EMPLOYMENT GROWTH PROSPECTS FOR THE UK % pa
3
2
1
0 2004
2005
2006 GVA
2007
2008
EMP
Source: Panel Forecasts.
3
As output growth slows over 2005-06, employment will
41/2% in August over concern about weak output and
grow less rapidly, averaging less than 1/2% pa, as
consumer spending growth. The Bank has not changed the
companies, struggling to pass on higher input prices, seek
repo rate since then, balancing the risks of higher inflation
to raise productivity. Employment growth is expected to
from commodity prices against the effect of a weakening of
pick up over 2007-08 as conditions improve. The
domestic spending. Consensus forecasts are for the repo
contraction of the workforce in manufacturing is expected
rate to stay at 41/2% until the end of 2005, with only a
to quicken slightly in 2006, before slowing to 2008. In
quarter point cut by September 2006.
business services, productivity growth is expected to slow over 2005-08 and as a result employment growth will pick
RISKS TO THE FORECAST
up slightly.
In our May forecast, the key risks and uncertainties were on the downside. The first was that a further weakening or a
CONSUMER AND PRODUCER PRICE INFLATION HAVE
stagnation of the dollar or continued weak euro-zone
STRENGTHENED
demand could adversely affect the UK’s trade
After weakening at the end of 2004, input price inflation
performance. The dollar has picked up and although it is
picked up during 2005, driven by higher crude oil prices.
expected to weaken slightly over 2005-07, it is not
1
The rate has fallen back from its July peak, but at 10 /4% it
expected to reach the lows of 2004. Weak demand from
remains high in the context of recent history. Output price
the euro-zone remains of greater concern for UK exports.
inflation has fluctuated within a small range, but has picked up from 21/2% in January. The slowdown in consumer spending and tough competition on the high street have restricted manufacturers’ ability to pass on rising input prices. Consequently, output price inflation was running at 31/4% year-on-year in September, and profit margins are under pressure. Consumer price inflation has risen steadily from 1.1% in September 2004 to 2.4% in August 2005 as rising crude oil prices have made energy and air travel more expensive. Currently, upward pressure is coming mainly from transport and food. The largest downward pressure is coming from recreation and leisure as consumers rein in their spending. With earnings growth having slowed from the rates of growth seen at the beginning of the year and unemployment picking up in the first half of 2005, any further upward movement is likely to be driven by oil prices. INTEREST RATES APPEAR TO HAVE PEAKED Despite the pick-up in input and output price inflation over the summer, interest rates were unchanged in 2005 until the Bank of England cut its interest rate (the repo rate) to
4
Our second concern was that oil prices could stay high or rise faster, feeding into input price inflation, which if fast enough, could lead to a rise in interest rates, with consequent effects on consumer spending and investment. Given the impact of Hurricane Katrina on US oil production and refining capacity, this clearly remains a risk. Our third concern was that consumer spending might undergo a sharper correction due to higher than expected interest rates or a stronger slowdown in the housing market. While a sharper than expected correction has happened, the volume of retail sales has not collapsed and it is looking less likely that the housing market will show a marked deterioration. We have also been concerned about geo-political risks affecting the future of oil or consumer or business confidence. These must remain. One last risk is that, in the event of a sustained slowdown, the government’s financial position deteriorates to the point that tax rises are required. The developing pensions situation may already be influencing consumer behaviour and could be a further factor playing into the government’s financial position.
Northwest Economy Outlook OUTPUT GROWTH IS ESTIMATED TO HAVE SLOWED
KEY POINTS
We expect the favourable performance of the Northwest
SHARPLY IN 2005
economy compared to the UK as a whole to have
The relatively strong performance of the Northwest
weakened considerably in 2005. From 2006 we predict
economy during 2003-04 was due to the coincidence of
average growth in GVA in the Northwest to fall back
favourable factors (robust household spending, recovery in
below the UK average.
manufacturing, strong construction activity linked in part to
In 2005, the Northwest economy is expected to have 3
grown by a little less than 1 /4%, a marked slowdown
in public services) rather than from a fundamental
from that seen in 2004. The slowdown is expected to be
improvement in the relative performance of the Northwest
most noticeable in distribution, hotels and catering, and
economy. These factors began to unwind towards the end
in manufacturing. Consumer-oriented services are
of 2004 and into 2005 with the result that growth in the
expected to have seen growth weaken as household
Northwest slowed sharply, in line with the slowdown
spending has been reined-in to reduce indebtedness
nationally, especially towards the later months of 2005.
and weaker economic confidence.
Slower growth in economic activity is generally reflected in weaker growth in employment, albeit with a lag. We expect growth in employment has slowed from over 1% in 2004 to 1/4% in 2005 and to only 3/4% in 2006. A modest increase in unemployment is therefore expected.
ongoing redevelopment activity and the continued growth
The weaker labour market will lead to a modest
The weakness of household spending is an important factor behind the slowdown in 2005, but we believe the Northwest has been slightly less affected by the slowdown in household spending than southern regions, at least for most of the year, where the housing boom has been stronger and indebtedness probably more pronounced.
slowdown in average earnings growth; the rise in
Table 1 illustrates the scale of the recent change in outlook
consumer price inflation will therefore squeeze real
for the UK as a whole that followed the recent publication
household incomes. However, the slowdown in
of data for 2005H1.
household spending in 2005 is greater than would be suggested by this alone, and will be influenced by a desire among households to reduce indebtedness. Household spending will remain weak to 2007. CHART 3: OUTPUT AND EMPLOYMENT GROWTH
TABLE 1: REAL GVA GROWTH (% PA) 2005
2006
2007
2008
N.West
1.7
1.8
2.5
2.5
UK
1.5
2.0
2.7
2.7
View at July 2005
PROSPECTS FOR THE NORTH WEST
N.West
2.7
1.8
2.4
2.4
4
W.Mids
2.6
2.0
2.4
2.5
3
London
3.0
2.6
3.0
3.0
2
S.East
2.8
2.5
3.0
2.9
1
UK
2.6
2.2
2.6
2.6
% pa
0 2003
2004
2005
2006 GVA
2007 EMP
2008
Source(s): Panel Forecasts, November 2005 and Cambridge Econometrics, July 2005.
Source: Panel Forecasts, November 2005.
5
CHART 4: RELATIVE GVA PER HEAD IN NORTHWEST (NOMINAL PRICES, UK=100)
we see few new developments of sufficient scale to compensate for schemes that are nearing completion.
92
Financial & business services have been one of the primary
91
drivers behind the recent growth in the Northwest. We
90
expect the sector to remain a key driver of growth over
89
2005-08, but at much reduced rates than have been seen recently. Growth of 33/4% is forecast for 2005, with growth
88 2001
2002
2003
2004
2005
2006
2007
2008
remaining at 3-31/2% pa to 2008.
Source: Regional Accounts and Panel Forecasts, November 2005.
Output in public services has generally at least grown in BUSINESS CONFIDENCE SLIPPED BACK IN 2005
line with the Northwest economy as a whole since 2000
The regular survey of businesses by The British Chamber of
due to the stimulus given by government spending, and the
Commerce reported confidence increasing at the end of
sector’s importance as a source of new jobs has been
2004, since then it has fallen back, particularly in
even greater. The sector is expected to outperform the
manufacturing. Within manufacturing, export markets
economy as a whole through the forecast period, with
appear more buoyant than domestic markets. The
growth slowing to 21/2% in 2005 and remaining at about
sentiment in services is more buoyant, with a large balance
this rate through the forecast.
of firms reporting improved turnover and profitability. The
CHART 5: PROSPECTS FOR OUTPUT GROWTH
survey continues to indicate further employment growth in services in the short term, and worsening employment prospects in manufacturing.
IN THE NORTHWEST % pa 6 5
MANUFACTURING GROWTH HAS WEAKENED SHARPLY IN
4
2005 AND SERVICES HAVE ALSO SLOWED
3 2
Manufacturing growth in the Northwest has been weak in recent years, despite outperforming the UK as a whole. Nationally, manufacturing output fell in the first half of 2005 and we believe that this has also been the experience in the Northwest. The decline is not expected to be prolonged,
0 -1
2003
2004
2005 Manufacturing
2006
2007
2008
Services
Source: Panel Forecasts, November 2005.
and modest growth is expected from 2006 onwards.
EMPLOYMENT GROWTH SLOWED IN 2005 AND WILL
Growth in the Northwest in distribution, retailing and hotels
REMAIN MODEST
& catering has slowed sharply recently. Output is estimated
The favourable economic growth in the Northwest over
to have grown by almost 51/2% in 2004 but growth of only
recent years has supported strong employment growth at
1 /4% is expected in 2005. The weak growth prospects are
rates in excess of those for the UK as a whole. However,
likely to remain in 2006, alongside weak growth in
growth slowed to just over 1% pa in 2004 and a further
consumer spending and the weaker housing market, before
slowdown is expected in 2005, with the expected
improving again from 2007.
weakening of growth in government and other services a
1
In recent years, growth in construction in the Northwest has not been as strong as in the UK. Construction output is set to rise further in the short term, but at still slower rates as
6
1
particular factor. Further increases in employment in 2006 are likely to be modest as continued job losses in manufacturing coincide with much weaker growth in financial & business services and government services.
Northwest and UK GDP 2001 - 2008 TABLE 2: SUMMARY DATA AND FORECASTS FOR THE NORTHWEST Units as indicated and % growth pa GVA (£2001m)
Consumer Spending (£2001m)
Unemployment Rate (%)
2001
87,579 2.3
70,899 2.9
3.7 -10.6
2002
88,742 1.3
73,088 3.1
3.5 -5.6
2003
91,028 2.6
74,628 2.1
3.2 -6.8
2004
94,390 3.7
77,280 3.6
2.9 -12.0
2005
95,953 1.7
78,517 1.6
3 4.0
2006
97,701 1.8
79,773 1.6
3.4 13.4
2007
100,142 2.5
81,376 2.0
3.3 -1.4
2008
102,635 2.5
83,394 2.5
3.3 0.4
UK GVA (£2001m)
Nominal GVA per head (UK=100)
Source(s): Panel Forecasts, November 2005.
TABLE 3: NORTHWEST AND UK GVA Units as indicated and % growth pa NW GVA (£2001m) 2001
87,579 2.3
859,799 2.3
89 0.5
2002
88,742 1.3
872,879 1.5
89 0.0
2003
91,028 2.6
893,236 2.3
89.8 0.9
2004
94,390 3.7
922,740 3.3
90.6 0.9
2005
95,953 1.7
936,729 1.5
90.8 0.1
2006
97,701 1.8
955,882 2.0
90.5 -0.3
2007
100,142 2.5
981,864 2.7
90.5 0.0
2008
102,635 2.5
1,008,289 2.7
90.6 0.1
Source(s): Panel Forecasts, November 2005.
7
Northwest Sector Output KEY POINTS
The recent experience of production at Jaguar's Halewood
We now expect 2005 to mark the trough in the current
factory illustrates the tough conditions faced by some
economic cycle on a year on year basis although the
exporters in 2005. Production was scaled back (albeit
turning point when growth stops slowing and begins to
temporarily) in the first half of the year in response to weak
pick up again in the Northwest is not expected until fairly
demand in the factory’s luxury cars in its key export
early next year. Growth on a year on year basis is likely to
markets. Marconi has recently undertaken a major
have slowed to 1.7% in 2005 as growth in services, and
rationalisation of its Edge Lane site in Liverpool because of
distribution, hotels & catering in particular have slowed.
the loss of a major contract with BT to foreign competition.
Manufacturing growth was modest during 2003-04 after
Within the food & drink sector domestic competition is
an earlier period of decline. We expect output to have
strong against the background of modest growth in
contracted slightly in 2005 by 1/4%. Growth is expected to
demand and pressure on prices from retailers. There is
return in 2006, and to strengthen through the forecast
evidence that firms investing in innovation and modern
period, but at a rate below 21/2% pa.
production techniques are performing well. One such
We expect that growth in public services peaked in 2004
company is Macaw that was recently taken over by a
at 33/4% but that growth after that will remain positive at
Canadian soft drink company. It had been looking to
around 21/2-23/4% pa in line with national spending plans.
develop own-brand products with customers. More
Some parts of the region may be becoming over
recently, a major fire at Greenall’s facility in Warrington will
exposed to changes in the future growth of public
disrupt its spirits distribution activities.
spending. Some worry that this may also prejudice the
The Northwest has a strong presence of energy-intensive
future dynamism and diversity of these economies.
industries, and they will continue to face increased cost
MANUFACTURING: Competitive pressures in many
pressures because of the recent rise in energy prices.
industries remain severe
Large firms may well have entered into contracts to limit
Manufacturing growth in the Northwest has been modest
the impact of rising fuel prices in the short term, but such
in recent years growing by 1- 1 /2% pa in 2003 and 2004.
arrangements may be coming to an end and so the full
This was a better outturn than for the UK as a whole and
impact of higher fuel prices may only start to be felt as new
made up the losses suffered during the previous two years.
long-term contracts are negotiated. Among the major
Chemicals, mechanical, electronic, electrical engineering
energy users are chemicals companies such as Ineos
and transport equipment are among the major
Chlor. The company has said it will cut back chlorine
manufacturing sectors that performed well in recent years.
production at its plants at Runcorn and Northwich if gas
In contrast food & drink and textiles and clothing are large
prices continue to rise through the winter.
1
sectors where growth had continued to be poor. We believe that manufacturing in the Northwest has suffered from difficult trading conditions in 2005, as has UK manufacturing more generally, and that output will turn out to have fallen during 2005. Nevertheless, the performance will have been better than that seen nationally. We see prospects then picking up slightly, with growth of less than 1% in 2006 and modest improvements subsequently in line with expected improvements nationally.
CHART 6: NORTHWEST SECTORAL GVA GROWTH % pa 9 8 7 6 5 4 3 2 1 0 -1 2003
2004
2005
2007
2008
Manufacturing
Construction
Distribution
Transport & communication
Financial & business services
Government & other services
Source: Panel Forecasts, November 2005.
8
2006
Elsewhere, future activity in aerospace looks promising in
DISTRIBUTION, HOTELS & CATERING: Growth slows
light of the rise in orders placed. Despite serious
sharply in 2005
competition, BAE Systems reported better than expected
Distribution, hotels & catering has performed strongly
results for the first half of 2005. The strong performance can
recently, growing by 4% in 2003 and almost 51/2% in 2004.
be expected to continue as nationally the sector saw
That such strong growth has been achieved, in excess of
defence orders placed during 2004 rise by over 40% and
growth nationally, is due in part to the significant investment
civil orders rose by almost 15%. BAE Systems is planning to
that has been made in the major retailing and leisure
invest and expand the engineering workforce at its
centres.
Samlesbury site, and will be looking for hundreds of engineers.
Manchester was ranked 4th top retail destination in the country and Liverpool 8th in 2005, which was an
CONSTRUCTION: growth to slow sharply in 2005 and could
improvement on previous years. However, Trafford Centre
remain weak through to 2008
dropped down the ranking of retail destinations to be
In recent years growth in construction in the Northwest has
placed 15th, though it remains ranked second best regional
not been as strong as for the UK as a whole. We estimate
shopping mall in the country.
1
growth slowed to 2 /2% in 2004 while employment rose by just under 1%. We expect construction output to rise further in the short term, given that orders placed appear to have held up, but at further reduced rates. Looking further ahead towards the end of the forecast period, we still do not yet see with any certainty new development initiatives of sufficient scale to sustain long-term growth in the sector and compensate for schemes that will be coming to
The effect of the expected slow down in household spending over 2005-06 will be to greatly reduce future growth to around 1% pa. Growth should recover to 21/421/2% pa towards the end of the forecast period with stronger employment growth and the immediate impacts of tourism linked to Liverpool’s European Capital of Culture in 2008 celebrations contributing factors.
completion. This is not to ignore the number of smaller
TRANSPORT & COMMUNICATIONS: Weak growth in 2005
projects that are planned or just underway, such as the
is not expected to persist
£400m development of Liverpool’s Kings Waterfront.
It is estimated that output in transport & communications
SERVICES: The outlook for business services remains reasonably favourable Surveys continue to show that confidence within the service sector is much greater than in manufacturing although there is a clear sign that demand slowed in the first half of 2005. Export markets appear to be relatively buoyant, with a larger balance of firms reporting increased orders from export markets than from domestic markets. There was a reported weakening in the immediate outlook for future profitability, but the balance remains significantly in favour of improvements, as does the balance of those
grew by 41/2% in 2004, after falling by 1/2% in the previous year. The region’s key transport gateways are performing well. Both Manchester and Liverpool airports have seen the strong growth in passenger numbers in 2004 carry into 2005, particularly in Liverpool, and each has major plans for further investment. At the same time concerns are growing over the wider sustainability of air transport. The Port of Liverpool continues to benefit from investment from Mersey Docks and Harbour Company as well as those using the port. The latest investments include new equipment at the Seaforth Grain Terminal.
expecting to increase employment in the short term.
9
We expect growth of 11/2% in the sector in 2005, as the
With call centre operations maturing, a certain amount of
sector suffers under the same influences as the in the UK
consolidation can now be expected, which may threaten
as a whole. Growth is likely to recover through the rest of
the smaller call centres in the region. The region is to lose
the forecast period. Air transport is expected to remain the
a small number of jobs in Morecambe as a result of the
best-performing part of the sector.
merger of the RAC with Norwich Union, but BT has
Communications is likely to see growth slow in 2005 as a result of slower economic growth generally, before picking up again over the remainder of the forecast period. FINANCIAL & BUSINESS SERVICES: Will remain a major source of growth for the region Financial & business services has been a key driver behind the recent growth in the Northwest. The sector accounts for over 15% of total output and has grown more than twice as fast as the overall regional economy in 2003 and 2004, and faster than UK growth in the sector. We expect it to remain a key driver of growth through the forecast period, albeit at more sustainable rates of growth than seen in the most recent past. Growth is likely to fall back to 4% in 2005 and the first half of 2006, but to slow thereafter before returning again to an underlying rate of 3% pa by 2007. Recent growth has been strongest among non-financial business services, and this feature is likely to have continued in 2005 with accountancy and legal firms in particular benefiting from work driven by new regulations. In the longer term, computing services is likely to see the strongest growth, with financial and other professional services growing at more measured rates. Prospects for future growth in the sector are linked in part to the office property market. There is currently little spare top grade office space in Manchester though some new space will come on stream in the city in the next couple of years. Liverpool is set to see a significant increase in new stock coming on the market by 2008, although rental levels still lag those of other UK cities.
10
reversed a decision to close one of its smaller call centres in Barrow-in-Furness and has designated it a long-term satellite site to larger BT centres. GOVERNMENT AND OTHER SERVICES: Growth will hold up through to 2008 Government and other services are an important sector, generating almost 25% of the region’s output and growing more rapidly than the rest of the economy. This pattern is expected to continue but with growth slowing to 21/2% in 2005 and then remaining at or slightly above this rate through the forecast period. The Government’s spending plans presented in the 2004 Spending Review, set out increases in spending nationally of over 4% in 2005/6 and 21/2% pa in the following two years. There is little evidence that the Northwest will benefit greatly from public sector relocations flowing from the Lyons Review. The health and education sectors have seen a number of high-profile mergers which are intended to improve the long-term prospects for the organisations and bring substantial investment. The merger of Manchester University and UMIST created the UK’s largest university. Plans for the new organisation allow for £100m to be invested in new staff and £300m in capital developments by 2015. While most of the additional employment opportunities in the sector will occur in education and health services, broadcasting and the related media sector will be boosted by the decision by the BBC to transfer 1,800 jobs to Manchester by 2009.
Northwest Sector Output 2001 – 2008
2003
2004
2005
2006
2007
2008
other services
Government and
business services
Financial and
communications
Transport and
and catering
Construction
Electricity, gas
19,318
1,720
4,963
14,845
6,943
13,698
20,283
87,579
-7.7
-0.2
0.8
1.7
1.7
2.9
4.3
2.4
2.3
756
157
18,887
1,679
5,096
15,413
7,174
13,784
20,750
88,742
9.8
-4.1
-2.2
-2.4
2.7
3.8
3.3
0.6
2.3
1.3
725
157
19,174
1,731
5,259
16,028
7,135
14,799
21,089
91,028
-4.1
-0.1
1.5
3.1
3.2
4.0
-0.5
7.4
1.6
2.6
746
157
19,376
1,717
5,396
16,897
7,471
15,960
21,860
94,390
2.8
-0.3
1.1
-0.8
2.6
5.4
4.7
7.8
3.7
3.7
756
159
19,344
1,716
5,477
17,082
7,592
16,558
22,399
95,953
1.4
1.4
-0.2
-0.1
1.5
1.1
1.6
3.7
2.5
1.7
760
159
19,521
1,717
5,520
17,249
7,770
17,050
23,020
97,701
0.6
0.1
0.9
0.1
0.8
1.0
2.3
3.0
2.8
1.8
767
160
19,982
1,736
5,565
17,628
7,996
17,618
23,651
100,142
0.8
0.5
2.4
1.1
0.8
2.2
2.9
3.3
2.7
2.5
773
162
20,463
1,742
5,619
18,074
8,247
18,144
24,244
102,635
0.8
1.4
2.4
0.4
1.0
2.5
3.1
3.0
2.5
2.5
Total
164
-7.7
and water
689
quarrying
Mining and
2002
Agriculture 2001
Manufacturing
ÂŁ2001m and % growth pa
Distribution, hotels
TABLE 4: NORTHWEST SECTOR OUTPUT
Source(s): Panel Forecasts November 2005
11
Northwest Expenditure KEY POINTS
restricting the growth in spending when overall economic
We expect household spending growth to record a sharp
growth picks up.
slowdown in growth in 2005 to 11/2%.
FIXED INVESTMENT: Growth will fall back from its
Slower growth in household incomes from 2006 will be
current rate
one factor curbing the growth in household spending in the longer term, but so will a wish by households to rebuild savings. The saving ratio is currently estimated at around 11/2% of disposable income and could rise Investment growth is expected to fall back in 2005 to around 41/2% as the growth in investment in dwellings falls back from its recent high rates. Manufacturing investment is expected to focus on cost-saving through to 2008.
a reduction on the growth of around 5% in 2004. This growth is once again expected to be supported by investment by the public sector, and growth in investment
slightly to around 31/2% by 2008.
Nationally, investment is expected to rise by 21/2% in 2005,
Growth in government consumption will have peaked in
by manufacturing and business services is now likely to be reined in following weaker than expected output growth. However, we also expect only weak growth in investment in dwellings. A modest recovery is expected during the course of 2006. Data on regional investment is very limited, but we
2004 at 5%. Growth is likely to fall back to around 3 /2%
consider it likely that investment growth in the Northwest
in 2005 and trend downwards to 3% by 2008 in line with
also quickened in 2004, to over 53/4-6%, with investment
national spending plans.
by transport & communications and wholesale and retailing
1
HOUSEHOLD SPENDING: Growth will continue, but weak employment growth will be a limiting factor from 2006
showing strong growth. Investment in housing is also estimated to have continued to rise strongly, by around 71/2%.
The general trends in household spending in the Northwest have been similar to those in the UK. The
The rate of growth of investment is likely to fall back to
weakness of UK household spending continued into 2005,
around 41/2% pa in 2005, slightly below the UK average,
with retail sales falling in 2005Q1. There has since been
with the anticipated slow down in growth in transport &
some temporary recovery in the retail sales volumes,
communications and dwellings being compensated by a
though growth is much weaker than in past years.
slight acceleration of growth by business services and a sharp acceleration in growth in investment by the
It is unlikely that the region has avoided the slowdown in
public sector.
household spending in 2005, but we do think that the scale of the slowdown will have been less than elsewhere
The positive outlook for business investment in the short
in the UK. Expenditure growth in the region in 2005 is
term is supported by recent surveys, which show a balance
thought likely to average 11/2% in 2005, down from an
of both manufacturing and service companies have revised up their plans for investing in plant & machinery and
1
estimated 3 /2% in 2004.
training. The reported balances are generally slightly higher Growth is likely to pick up a little in 2006, although the
than they were at the end of 2004 and larger than for the
scope for this will be curbed by only modest employment
UK.
growth and the squeeze on real incomes from higher consumer price inflation. Further, the saving ratio was
12
Investment growth is set to slow sharply in 2006 as public
estimated to have been only 1 /2% in 2004, making it
sector growth in the public sector reverts to more
among the lowest outside of the South East. Some
sustainable rates, and as growth in manufacturing
rebuilding of savings can be expected in the medium term,
investment weakens.
1
Components of Northwest Expenditure 2001 – 2008 TABLE 5 NORTHWEST EXPENDITURE £2001m and % growth pa Household Expenditure
Government Consumption
Investment
Exports
Imports
2001
70,899 2.9
19,121 2.8
15,282 1.6
75,500 0.3
81,103 1.6
2002
73,088 3.1
19,808 3.6
15,526 1.6
75,154 -0.5
81,557 0.6
2003
74,628 2.1
20,424 3.1
16,013 3.1
76,337 1.6
82,357 1.0
2004
77,280 3.6
21,474 5.1
16,934 5.8
78,550 2.9
85,250 3.5
2005
78,517 1.6
22,223 3.5
17,708 4.6
79,926 1.8
87,060 2.1
2006
79,773 1.6
22,974 3.4
18,095 2.2
80,805 1.1
89,149 2.4
2007
81,376 2.0
23,661 3.0
18,783 3.8
82,857 2.5
90,881 1.9
2008
83,394 2.5
24,359 2.9
19,398 3.3
84,646 2.2
92,251 1.5
Source(s): Panel Forecasts, November 2005.
TABLE 6: NORTHWEST HOUSEHOLD INCOME AND SPENDING Units as indicated and % growth pa
Saving (£m)
Saving Ratio (% of disp. income)
Household Disposable Income (£2001m)
Household Spending (£2001m)
70,899 5.3
2,806 43.7
3.8 35.0
73,704 4.0
70,899 2.9
75,739 2.8
74,222 4.7
1,517 -45.9
2.0 -47.4
74,582 1.2
73,088 3.1
2003
79,103 4.4
77,250 4.1
1,853 22.1
2.3 16.9
76,418 2.5
74,628 2.1
2004
82,279 4.0
81,021 4.9
1,259 -32.1
1.5 -34.7
78,481 2.7
77,280 3.6
2005
85,903 4.4
83,683 3.3
2,220 76.4
2.6 69.0
80,600 2.7
78,517 1.6
2006
89,663 4.4
86,833 3.8
2,830 27.5
3.2 22.1
82,373 2.2
79,773 1.6
2007
93,712 4.5
90,498 4.2
3,214 13.6
3.4 8.7
84,266 2.3
81,376 2.0
2008
98,130 4.7
94,777 4.7
3,353 4.3
3.4 -0.4
86,344 2.5
83,394 2.5
Household Disposable Income (£m)
Household Spending (£m)
2001
73,704 6.4
2002
Source(s): Panel Forecasts, November 2005.
13
Northwest Labour Markets KEY POINTS
Employment growth in the region in 2005 is expected to
rates to pick up in the short and medium term. Our view is
weaken to 0.7% from 1.1% a year earlier, before slowing
that this is also likely in the Northwest, especially in 2006
1
to /4% in 2006.
Nationally, a number of forecasters expect unemployment
when employment growth is likely to be at its weakest.
The main source of employment growth in the next few years will continue to be financial and business services
SKILLS: Conflicting evidence on the skills problems in
and public services. Manufacturing employment is
the region
expected to continue to decline, though at slower rates
Results from the recently published National Employers
than have been experienced recently.
Skills Survey for 2004 show that the Northwest was the
Recent unemployment data give somewhat conflicting
only UK region to see a rise in total vacancies, and in
messages regarding the recent trends in unemployment,
vacancies that are hard to fill, indicating that businesses in
but we interpret the trend now as being modestly
the region are finding it increasingly difficult to meet their
upwards.
growing demand for labour.
EMPLOYMENT GROWTH IS EXPECTED TO CONTINUE TO WEAKEN IN 2006
Further analysis of this data suggests that the recruitment problem is not primarily a skills issue because so-called skill-shortage vacancies were found to have fallen.
In Spring 2005, we expected employment growth to
Employability in some areas and a mismatch between
weaken in 2005, with prospects in the public sector in
young applicants with degrees and vacancies at technical
particular much weaker than seen in 2004. The growth in
and supervisory levels are related difficulties reported by
financial & business service employment was expected to
the Panel.
fall back slightly in 2005 with slower output growth, and continuing job losses were anticipated in manufacturing through the forecast period. This remains our general view. Overall employment growth
CHART 7: RECENT DEVELOPMENTS IN THE LABOUR MARKET % Workforce 10 8
is expected to slow to 0.7% in 2005, before weakening
6 4
1
further to /4% in 2006. Employment growth is forecast to pick up as output growth recovers further in 2007. While employment growth in the Northwest is set to exceed that
2 0 -2
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-4
in the UK in 2005, thereafter the previous underlying trend
NW Unemp
UK Unemp
NW Empl
UK Empl
of underperformance is set to return. CHART 8: NORTHWEST SECTORAL EMPLOYMENT GROWTH UNEMPLOYMENT: Set to rise Recent movements in Northwest unemployment have mirrored those nationally, with claimant count unemployment edging up slightly during the first half of
6 4 2 0
2005 to 2.9% of the workforce in June. Also reported rates
-2
of unemployment on the wider International Labour
-4
Organisation (ILO) definition rose towards the end of 2004 and into 2005, before falling again in its second quarter to just under 41/2% of the economically active.
14
% pa 8
2003
2004
2005
2006
2007
2008
Manufacturing
Construction
Distribution
Transport & communication
Financial & business services
Government & other services
Source for both: Panel Forecasts.
2008
Northwest Labour Markets 2001 – 2008 TABLE 7: NORTHWEST LABOUR MARKET Units as indicated and % growth pa Employees in
2001
2002
2003
2004
2005
2006
2007
2008
Employment
Employment
Unemployment
Unemployment
Unemployment
(000s)
(000s)
(000s)
rate (%, NW)
rate (%, UK)
2,868
3,220
124
3.7
3.2
1.5
1.5
-9.8
-10.6
-11.4
2,921
3,266
118
3.5
3.1
1.8
1.4
-4.5
-5.6
-3.1
2,959
3,325
112
3.2
3.0
1.3
1.8
-5.3
-6.8
-2.1
2,978
3,362
99
2.9
2.7
0.6
1.1
-11.3
-12.0
-9.0
3,003
3,386
104
3.0
2.9
0.9
0.7
4.8
4.0
4.5
3,016
3,393
119
3.4
3.2
0.4
0.2
14.1
13.4
11.9
3,044
3,417
118
3.3
3.2
0.9
0.7
-0.8
-1.4
0.4
3,064
3,432
119
3.3
3.2
0.7
0.4
0.9
0.4
-1.0
Source(s): Panel Forecasts, November 2005.
15
Northwest Sector Employment 2001 – 2008
2003
2004
2005
2006
2007
2008
other services
Government and
business services
Financial and
communications
Transport and
and catering
Construction
18
196
770
201
520
981
3,220
-14.9
2.6
-5.3
11.7
5.0
1.9
4.3
3.6
2.9
1.5
23
3
480
15
199
776
208
549
1,015
3,266
-10.2
-22.1
-5.0
-20.3
1.5
0.8
3.5
5.5
3.5
1.4
24
2
465
10
208
786
218
584
1,028
3,325
4.5
-9.0
-3.1
-32.7
4.9
1.3
4.7
6.4
1.2
1.8
26
2
453
8
203
804
218
596
1,054
3,362
7.7
2.0
-2.7
-22.2
-2.3
2.3
-0.1
2.0
2.6
1.1
28
3
447
8
206
807
217
606
1,065
3,386
8.3
9.0
-1.2
-1.9
1.1
0.4
-0.1
1.8
1.1
0.7
27
3
441
7
205
809
218
611
1,073
3,393
-1.4
0.2
-1.5
-3.0
-0.5
0.3
0.1
0.8
0.7
0.2
Total
506
and water
3
27
3
436
7
204
815
219
623
1,084
3,417
-1.2
-0.6
-1.0
-3.3
-0.5
0.8
0.6
2.0
1.0
0.7
27
3
433
7
203
819
220
630
1,091
3,432
-1.2
0.1
-0.8
-3.3
-0.3
0.4
0.7
1.2
0.7
0.4
Source(s): Panel Forecasts, November 2005.
16
Electricity, gas
25
quarrying
Mining and
2002
Agriculture 2001
Manufacturing
000s and % growth pa
Distribution, hotels
TABLE 8: NORTHWEST SECTOR EMPLOYMENT
Northwest Prices and Earnings KEY POINTS
Comprehensive data on regional prices are not yet
Inflationary pressures are increasing, though prices
regularly available, with the data that are published
increases remain modest despite the lengthening period
currently enabling comparison of relative price levels rather
of sustained high commodity prices. We expect inflation
than relative inflation rates. Data for 2004 indicate prices in
to be maintained within, or only slightly above, the
the Northwest were around 3% lower than nationally but
current target range to 2008, making it difficult for the
that much of the difference was due to relative mortgage
Bank to cut interest rates much further in the short term.
and council tax costs.
The growth in average earnings picked up in 2004 and
Independent forecasters do not foresee inflation taking off.
continued into 2005, though we expect growth for the
The consensus forecast is for CPI inflation to average just
year as a whole to slow to 41/2%.
under 2% pa in 2005 and 2006 and for underlying RPI
PRICES AND INFLATION: Inflationary pressures are picking
inflation to be a bit higher at 2.2% pa.
up a little
We expect inflation in the Northwest to move in line with
Nationally, headline indicators show inflation has picked up
changes nationally.
through 2005 but that rates remain modest by historical standards. Consumer Price Index (CPI) inflation rose to
EARNINGS: growth is expected to weaken
2.4% in August from just over 11/2% at the beginning of the
Nationally, average earnings inflation picked up slightly at
year. Although the price of oil and other inputs to
the end of 2004. The rate of inflation continued to rise
production have seen strong rises the CPI records little
during 2005Q1, but then slowed and has been running at
inflation in the price of most goods. In contrast, inflation in
4% since May. Pay rates have been growing more rapidly
services is now at 41/2%. The weakness in goods prices is
in services than in manufacturing, although the differential
also borne out in the British Retail Consortium Shop Price
has closed a little in recent months as service sector
Index (SPI), which recorded prices in August 2005 almost
average earnings inflation has fallen back towards 4%.
1
/2% lower than a year earlier.
Earnings rose faster in public sector services than in the private sector for much of the last four years, though the
Inflation in the price of materials and fuels to manufacturing
differential has now almost closed.
has risen steadily since March 2004 to reach over 14% in July 2005. In contrast, output price inflation has
Independent forecasters generally expect that the slight
accelerated only modestly, to 3.3% in September. If food,
increase in average earnings inflation in the UK in 2005 will
drink and petroleum production are excluded, then output
not be sustained in 2006 and 2007 as employment growth
price inflation has actually been on a downward trend
weakens.
since the end of 2005 and was running at 2.1% in
We estimate average earnings growth in the Northwest
September. Business surveys continue to report a balance
accelerated to just over 41/2% in 2004. This rate of growth
of firms, in both manufacturing and services in the
will probably persist in 2005 as employment growth
Northwest and the UK, expecting to raise prices as they
remained strong, before falling back slightly to 41/4% pa
have for some time.
thereafter.
17
Northwest Prices and Earnings 2001 – 2008 TABLE 9: NORTHWEST PRICES AND COSTS Units as indicted and % growth pa
2001
2002
2003
2004
2005
2006
2007
2008
18
Retail Price
Personal
Index excl.
Consumer
Average Earnings
Average Earnings
Retail Price
Mortgage Interest
Expenditure
(NW)
(UK)
Index (RPI)
Payments (RPIX)
NW
(£s)
(£s)
(1987=100)
(1987=100)
(2000=100)
18,045
18,648
173.4
171.3
100.0
4.9
5.1
1.8
2.2
2.1
18,615
19,323
176.2
175.1
101.4
3.2
3.6
1.6
2.2
1.4
19,156
19,912
181.3
180.0
103.2
2.9
3.0
2.9
2.8
1.7
19,929
20,763
186.7
184.0
104.3
4.0
4.3
3.0
2.2
1.0
20,840
21,715
190.3
186.0
105.8
4.6
4.6
1.9
1.1
1.4
21,748
22,642
194.9
189.8
107.9
4.4
4.3
2.4
2.0
2.0
22,690
23,611
199.9
193.5
110.1
4.3
4.3
2.6
2.0
2.0
23,695
24,639
205.2
197.1
112.4
4.4
4.4
2.6
1.9
2.1
Northwest Construction and Housing KEY POINTS
inflation in the Northwest slowed sharply through 2005,
The value of construction activity in the first half of 2005
though average prices have continued to rise. Underlying
grew by 4% year-on-year. A strong increase in housing-
the sharp slowdown in house price inflation is a very sharp
related work compensated for a sharp fall in new
reduction in the number of transactions.
infrastructure and other public work. The level of new
The weakening in the housing market has generally been
orders placed held up into 2005, particularly for housing
in line with expectations, and the fact that the market
and commercial work.
seems to be beginning to stabilise suggests that there is
The region’s housing market weakened further in the first
now only a small risk of a further sharp downturn.
half of 2005, with the number of transactions in particular
falling further. We do not expect a collapse in the
HOUSING INVESTMENT: Underlying prospects for public
housing market, but rather weak growth for several years.
and private investment are good
The outlook for public and private investment in housing
The prospects for housing investment in the region are
is favourable with a number of factors supporting
favourable. Housing starts rose by almost 11% in 2004,
investment in both the short and longer term.
and further, albeit modest growth, is expected in 2005.
CONSTRUCTION ORDERS: The value of orders placed has held up into 2005 Recent data indicate that the value of construction orders
The current strength of new orders will support work in the short term and underlying demographic factors can be expected to maintain strong demand for new housing in the long term.
placed has held up into 2005. Orders for house building in particular remain at levels recorded through 2004. There
There is also substantial public sector investment in
has been a fall in orders for public sector and private
housing. The region has four housing market renewal
industrial work while there has been an upturn in private
pathfinder areas; Merseyside, Manchester/Salford, East
commercial orders placed, particularly for retail facilities.
Lancashire and Oldham/ Rochdale, which together are
While there is quite a lot of commercial property space
bringing in over £300m of government funding by 2006 to
being built, this appears to be supported by low interest
renovate the poor housing stock. This is in addition to the
rates rather than demand. Occupancy rates do not appear
£250m pa the region receives from government through
to be rising.
the Regional Housing Allocation.
The value of construction activity in the first half of 2005
CHART 9: RECENT DEVELOPMENTS IN THE
was 4% higher than both a year earlier and the second half of 2004. Most of this increase is due to the housing sector. New work on other than housing has fallen back, particularly that relating to infrastructure and other public work. New work on private commercial projects has held up. HOUSE PRICES: the market has continued to weaken through 2005
HOUSING MARKET % pa 30 20 10 0 -10 -20 -30 -40 -50 1997Q1
1998Q1
1999Q1
UK house prices
2000Q1
2001Q1
NW house prices
2002Q1
2003Q1
ENG Transactions
2004Q1
2005Q1
NW Transactions
Source: ODPM.
The gradual rise in interest rates through 2004 was accompanied by a weakening in the housing market, both nationally and in the Northwest, and this has continued through the first half of 2005. The rate of house price
19