http://www.nwda.co.uk/pdf/BusinessForecastsDec05

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