/NWDA_SHORT_TERM

Business Forecasts Northwest A Short Term Forecast for 2008-11 Spring 2008

A report by the Northwest Regional Economic Forecasting Panel

This report is published by the Northwest Development Agency Research Team as part of its continuing commitment to inform the economic development of the Northwest of England.

It has been produced by SQW Ltd and Cambridge Econometrics Ltd, economic development consultancies, on behalf of the Northwest Economic Forecasting Panel.

Whilst every effort has been made to ensure the accuracy of the material in this report neither the panel, SQW Ltd, CE Ltd nor the 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 Nicola Christie.

Press enquiries should be addressed to Neil Roscoe.

Nicola Christie Economist Research Team, NWDA Nicola.Christie@nwda.co.uk 01925 400293 Neil Roscoe Senior Press Officer NWDA Neil.roscoe@nwda.co.uk 01925 400232

Foreword Businesses across the country face difficult and uncertain times over the next eighteen months. The Panel now expects economic growth will slow to 1.5 per cent in the UK this year and to 1.3 per cent in 2009, before a better 2010 and a stronger 2011. The Northwest will be somewhat sheltered during the downturn, but by a lesser margin than we expected shortly after the credit crisis began. In the recovery period, and consistent with long run trends, growth in the region is likely to begin to be rather slower again than in the UK, but faster than was seen on average in the 1990s.

There are unusual risks and uncertainties around this forecast. For instance, there are signs from recent survey data of service firms that the downturn could be sharper, especially in the South, and the dollar’s weakness is a source of particular uncertainty. As one Panel member put it, ‘never before have I wished so much for a crystal ball’.

In our forecast agreed in October 2007, we expected that London and its surroundings would be hardest hit from problems stemming from difficulties in the financial sector, and that the Northwest would be relatively immune. While the effect on London remains, it is now clear that firms and households across the country are being affected by higher arrangement charges. Steeper loan rates for new credit are also proving harder to get.

Panel members say this is leading to delayed expenditures and a reassessment of investment plans in many businesses. This is in addition to effects on house prices, and on the disposable income of an increasing number of households having to refinance their mortgages at higher rates.

While immediate problems in the financial sector stemming from the ‘sub-prime crisis’ should have worked through by next year, much tighter credit conditions are unlikely to ease that much, at least not in the period to 2011 covered by this forecast. Attitudes to risk among lenders appear to have hardened too much for that.

Completely unforeseen in our Autumn 2007 forecast was that oil and food prices would rise as much as they have.

Especially if we take into account the increase in oil prices since 2005, there has been an oil price hike bigger in real terms than those seen in 1974 and 1979, both of which led to recession in the world economy. This we do not

expect, mainly because world output is significantly less energy intensive than it was thirty years ago. But a risk of recession cannot be ruled out.

Even if oil prices fall back significantly from a trading range between $120 and $140 per barrel seen around the time of writing because of more efficient energy use, increases in supply encouraged by higher prices, and the sale of speculative stocks, a major cause of this price hike has been increasing demand from rapidly growing Far Eastern economies. Their growth may slow, but is not going to go away.

A second major cause has been significant weakness in the dollar, in which oil is traded. For many years, US consumers have helped to fuel world demand, such that the US has run very large trade deficits financed by equally large additions of US assets to savings in the rest of the world.

It has, however, long been regarded as inevitable that this fundamental imbalance would have to unwind one day, with a much weaker dollar aiding the adjustment. It is not yet clear whether such an adjustment is underway, but dollar weakness is adding to uncertainty, and to the scale of this oil price hike.

More immediately, businesses and households in many parts of the world already face higher fuel and energy bills, and these do not yet reflect the full extent of the recent rise in the price of oil, as they are bound to before long.

Two important effects follow. First, especially if oil price falls from present levels are gradual or delayed, or if they have further to rise, a significant shift in international spending power away from consumers to producers of oil has to work its way through into new global patterns of demand and investment.

This adjustment should be quicker than after 1974 or 1979, when it took several years to correct, because oil producers now take a more global view of opportunities, and financial markets are even better developed to help.

But the fact that the UK is now a net importer of energy still means that we are likely to have to import less of other goods and services and export more, or see more assets sold to oil producing interests, to avoid further weakness in the pound, which is already making all our imports more expensive.

On top of the effects of tighter credit conditions mentioned above, which some believe include effects of lower house prices on spend, the most immediate consequence of the oil price hike - reduced domestic spend on other goods and services, especially after next winter’s fuel bills begin to arrive - helps to explain why we think growth in the region and the UK will be even slower in 2009 than in 2008, even if this result is likely to mask the beginning of recovery during next.

Agency. We are grateful to the Unit for their support, for the knowledge they contribute, and for publishing our papers. We are also grateful to Cambridge Econometrics supported by SQW Consulting for draft material we have taken account of in preparing this forecast.

Second, is the effect of higher oil and food prices on inflation and what this means for interest rates, especially if earnings growth begins to rise in an attempt to protect living standards after oil and food related costs have been met. On this the bank of England’s Governor has made it very clear that the Monetary Policy Committee he chairs will take whatever action is necessary to recover its inflation target. No-one can argue they have not been warned and our new forecast assumes that base rates will be held until recovery becomes well established in 2010.

But there is a risk that the next moves in interest rates will be upwards, which would also dampen future growth more than is shown in this forecast.

David Coates

This unusually long foreword tries to give a ‘big picture’ view of the conditions and uncertainties we face, while our forecast presents a ‘most likely’ view based on information available around the end of May that is before oil prices reached $1.40 a barrel and the latest price index showed a rise of 3.3% in a year. Readers should therefore bear in mind that growth figures in this report for the next two years or so could prove to be a little lower than we have shown.

After well over a decade of relative economic stability that has certainly helped the Northwest, and especially on top of the effects of tighter credit conditions, I do not welcome the sense of deja vu I feel in writing about oil price hikes, international adjustment, and mounting inflationary pressures, sources of uncertainty that were all too familiar in the 1970s in my earlier days as a government economist.

Though I fear they may not, I trust we shall find these difficulties will work though as quickly and painlessly as this new forecast suggests.

While the Panel is independent of NWDA, we enjoy the support of the region’s Research Unit, based in the

As ever, we should be grateful for any comments and suggestions to guide our work. These may be sent through to Nicola.Christie@nwda.co.uk.

Panel Chairman June 2008

Executive Briefing NORTHWEST OUTLOOK •

The Northwest economy is forecast to grow by 1.7% in 2008, a sharp slowdown from 2.6% in 2007. Although we expect recovery to have begun by the middle of next year, the outcome for growth in the Northwest in 2009 as a whole is likely to be only 1.5%, roughly the same as in the downturn in 2005. Regional growth is then expected to strengthen to 2.2% in 2010, before moving above trend to 2.9% in 2011.

•

The pattern of growth in the Northwest is expected to mirror that in the UK. The slowdown is expected to be somewhat less marked in the Northwest, with growth perhaps 0.2 percentage points (pp) above that in the UK in 2008 and 2009. However, the strength of the subsequent recovery is similarly expected to be somewhat less rapid than in the UK. GVA GROWTH IN THE NORTHWEST AND UK

GVA GROWTH IN THE NORTHWEST AND UK % pa 4 3 2 1 0

2006

2007

2008 2009 2010 NW UK Source: Regional Accounts and Panel Forecast.

2011

in Transport communications • All GVA sectors in the &Northwest are expected to experience % paslower growth in 2008 than in 2007 with the exception 8of government and other services. The sharpest slowdown is likely to be seen in financial & business 6 services, although this is still likely to be the fastest 4growing sector in the regional economy this year.

•

2Financial

& business services in the Northwest have seen strong growth in recent years. We expect this 0 to slow sharply in 2008 and 2009, but the scale of this 2005 2006 2007 2008 2009 2010 2011 slowdown will not be as severe as in and around NW UK London, and therefore in the UK as a whole. Similarly, the type of work undertaken in the sector in the Northwest is likely to mean its recovery in 2010 and 2011GVA willinnot be as& strong in the UK, again because Financial Businessas Services of London.

% pa

10 • Although manufacturing in the Northwest has performed a little better than in the UK for a number 8 6 4

of years, surveys indicate confidence among Northwest manufacturers fell sharply at the beginning of 2008, weaker than in the UK as a whole. Some firms will be helped in European markets by weaker sterling, but many others are likely to be affected by the global slowdown. More generally, increases in input prices for manufacturing are concerning. Overall, little output growth in manufacturing is expected in the region in 2008 or 2009. This is expected to recover in 2010 and to pick up further in 2011.

•

Growth in consumer-related services, such as retailing and hotels & catering, is expected to slow sharply in the region to 1.5% in 2008 as consumers rein back spending in response to a weak housing market, tighter credit markets, higher fuel and energy costs, and slower jobs growth. Currently, saving rates in the Total GVA Northwest are among the weakest in the UK, and the region also saw some of the%largest falls in house prices pa 4 in the early part of 2008. We expect consumer related services in the Northwest to move in line with the 3 sector nationally, with growth slowing further in 2009 before recovering to 2.2% in 2010 and 3.1% in 2011.

•

Employment in the Northwest rose by just over 1% in 2007, reversing the fall registered in 2006. The swing 1 reflects a large number of jobs 2005 created 2006 in financial 2007& 2008 business services following a pause in 2006.

NW U Distribution, hotels & catering and manufacturing saw further job losses in 2007. Whilst the loss of jobs in manufacturing in 2007 was at the smallest rate since 2000, it still amounted to 1.7% of the roughly GVA in Manufactu ri 400,000 jobs in the sector in 2006, and 2007 was also the third consecutive year in which there was a fall % pa 3 of jobs in distribution, hotels & catering, a sector that now has nearly twice as many 2jobs in the region as manufacturing.

1

•

The outlook is that total jobs growth 0 will slow to around 0.2% in 2008, before falling by 0.2% in 2009 as a result -1 of greater job losses in manufacturing and construction, -2 and some further losses in distribution, hotels & 2005 2006 2007 20 catering. Total jobs growth is likely to return in 2010, NW albeit at a modest rate, and to strengthen to 1% in 2011. With more than 660,000 jobs already in the Northwest, financial & business services are expected to create the majority of its new jobs up to 2011, but again at a quite modest rate. % pa

2

4 3 2 1

2

0

0

-1

WORLD AND UK BACKGROUND •

The full impact of the crisis in the global credit markets has yet to work through leaving considerable uncertainty about prospects for the world economy, and hence for the UK. Growth in the major developed economies is expected to be considerably weaker in 2008 than in 2007, although the consensus view is that US growth will start to recover again towards the end of 2008. However, there is a risk that this view will prove optimistic.

•

In addition to the credit crisis, the world economy is also having to adjust to much higher oil and food prices, and to the increased inflationary pressures these and other changes are bring about. The price of oil and food commodities has risen sharply especially since September 2007, with oil reaching around $140 per barrel early in June 2008. Weaker world growth in 2008 and 2009 should curb demand pressures on oil in particular, and some reduction in price can be expected for this and other reasons. However, we are no longer in the world we knew between 1987 and 2004 when oil generally traded below $40 per barrel at today’s prices. Lower consumption of other goods and services seems inevitable in oil consuming countries.

•

UK growth remained relatively strong at the beginning of 2008. However, there are reasons to believe the economy is now slowing quite sharply, and we expect UK growth will slow to 1.5% in 2008 and to 1.3% in 2009 after 3.2% in 2007. The prospect is that modest recovery will begin around the middle of next year, with firmer recovery thereafter reaching 2.2% in 2010 and 3.3% in 2011. However, much depends on the precise timing of when confidence returns in financial and consumers’ markets, and whether the Bank of England can avoid raising interest rates in the meantime.

RISKS TO THE FORECAST • The key risks to this Spring 2008 forecast are on the downside, especially this year and next.

•

Globally, measures already introduced may not be sufficient to restore normality to key financial markets.

This would prolong the period of tighter lending conditions and the slowdown in real activity. The US economy may not start to recover from towards the end

of 2008 (the current consensus view) if confidence among consumers in particular fails to recover following the recent cuts in interest rates.

•

With increasing inflationary pressures, the major developing economies may not provide the support to world growth that is expected because higher interest rates are likely to be needed to contain inflation.

•

Oil and other energy prices may not ease as helpfully as is assumed in this forecast. This will increase the transfer of spending power to oil producing countries, increasing the scale of international adjustment to the oil price hike, and adding to the challenge the authorities face in containing inflationary pressures without stifling growth.

•

At home, there is a risk that consumer confidence may weaken sharply leading to larger cuts in discretionary spending in 2008 and delaying eventual recovery.

This could occur, for instance, if the fall in house prices accelerated sharply. The downturn would be exacerbated if domestic inflation strengthens further requiring the Bank of England to raise interest rates.

In any case, we do not expect interest rates to be cut, despite slowing economic growth.

POINTS TO WATCH • Particular points we shall monitor include: • What happens in the world economy especially to the US economy, the dollar, sterling, and the price of oil • What happens to the UK economy, including decisions on interest rates.

• Whether financial & business services in the Northwest are less affected during the economic slowdown than the sector in the UK as a whole.

• Whether sentiment among Northwest manufacturers begins to recover sooner than in other parts of the UK. • Whether consumers rein-in their spending more or less than is anticipated, and the impact that the housing market appears to be having.

• How far construction projects in the region are scaled back or delayed.

CHART 7: GVA IN CONSTRUCTION

% paGROWTH IN THE NORTHWEST AND UK GVA 4 3 GVA GROWTH IN THE NORTHWEST AND UK 2 1 0 -1 2005 2006 2007 2008

% pa 4 % pa 43

Sectoral Growth Charts 2 3

0 1

TOTAL GVA

Total GVA

% pa 4 % pa 4

% pa 4

2

2

1 2006

2007

2006

2008

NW 2008

2007

2009

UK 2009

NW

2010

2010

2011

2011

1 2005

2006

0

2007

2008 2009 2010 GVA in Manufactu ring NW UK

Manufactu ring 2010 2006 2007GVA in2008 2009 %IN pa MANUFACTURING GVA 3

% pa 3 2 1

% pa 3

0

2

-1

% pa 3 1

NW

2010

2007

2008 NW

2009 UK

2011

2010

2011

2011

2005

2006

2009

6 8

0 2005

4 6

2008

NW 2008

2009

UK 2009

NW 2006

2007

2010

2010

2011

2011

UK

2008

2 4 0 2 2005 0

2006

2007

2010

2006

2007

2008

NW UK % pa 4 2005 2006 2007 2008 2009 2010 2011 % pa 3 NW UK 4 2 3 1 % pa 2 4 0 1 3 -1 0 % pa 2005 2006 2007 2008 2009 2010 2011 4 2 -1 NW UK 3 1 2005 2006 2007 2008 2009 2010 2011

GVA IN CONSTRUCTION

NW

2006

NW

8 6 4 2 0 % pa -2 2006 3 -4% pa -6 3 2 -8

2006

2007

2008

2009

2010

-1 2005

2006

2007

NW

UK

2008

2009

0

NW UK GROWTH CHART 2: OUTPUT AND EMPLOYMENT

2005

2006

2011

2010

2011

UK

2009

2010

Construction Financial & business services

2011

Distribution Government & other services

2005

2006 2006

2007

2008

NW 2007 2008

2009 UK 2009

2010 2010

2011 2011

UK

2011

2011

WEIGHT OF KEY SECTORS IN OVERALL GVA (% of total.

2006) CHART 1: PROSPECTS FOR GROWTH IN THE

WORLD ECONOMY CHART 1: PROSPECTS FOR GROWTH IN THE

Manufacturing % pa 4 Construction % pa 3 4 Distr. hotels & catering 32 Transport & comms 1 2 Financial & Business services 0 1 2006Q1& other 2007Q1 2008Q1 2009Q1 Public services 2006Q1

US

Japan 2007Q1

Eurozone 2008Q1

18.3 6.3 16.7 8.2 21.2 23.0

UK 2009Q1

US Cambridge Japan Eurozone UK Source(s): Econometrics

NW FOR THE UK UK PROSPECTS

% pa

2010

Northwest

WORLD ECONOMY

0

2011

CHART 2: OUTPUT AND EMPLOYMENT GROWTH

3.5 %CHART pa 3.02: OUTPUT AND EMPLOYMENT GROWTH PROSPECTS FOR THE UK 3.5 2.5 3.0 2.0 1.5OUTPUT AND EMPLOYMENT GROWTH CHART 2.5 2: PROSPECTS FOR THE UK % pa2.0 1.0 0.5 3.5 1.5 0.0 3.0 1.0 2006 2007 2008 2009 2.5 0.5 % pa EMP GVA

2010

UK 2009

2008

NW

2010

2007 PROSPECTS 2008 FOR2009 THE UK 2010

2007

2005

GVA IN DISTRIBUTION, HOTEL AND CATERING

2 0 2005 1

2011

1 0

2011

% pa 4 5GVA in Distribution, hotel & catering 3 4 2 3 % pa GVA in Distribution, hotel & catering 5 1 2 4 0 1 % pa 2005 2006 2007 2008 2009 2010 2011 5 3 0 4 2 NW UK 2005 2006 2007 2008 2009 2010 2011 3 1

2010

GVA in Public and Other Services

Manufacturing 2 Transport 1 & communication

UK

NW UK GVA in Distribution, hotel & catering 2006 2007 2008 2009 2010 GVA in Distribution, hotel NW UK & catering % pa 5

2009

in Public and OtherOTHER Services GVA IN GVA PUBLIC AND SERVICES

0

1 -1 2005 0

2011

UK

2009

NW 2007 2008

% pa

2011

2008 NW

2005

2009

-2

2 0

2011

2010

UK

CHART 13: NORTHWEST SECTORAL EMPLOYMENT GROWTH

0 -2 2005 -1

2010

UK 2009

% pa GVA in Financial & Business Services 2 10 % pa 8 1 10

2007

2007

2008 NW 2008

GVA IN FINANCIAL AND BUSINESS SERVICES

2011

-2

1 -1

2007 2007

NW

0 GVA in Manufactu ring -1 2006

2006 2006

2011

CHART 11: GVA in Public and Other Services

GVA in Manufactu ring

2005

2005

2010

UK

% pa 3 GVA in Financial & Business Services

2 1

2009

NW

2005

UK

-2

2 0

2006

20

UK

1 2005

2009

% pa GVA in Transport & communications 8 6 % pa 4 86 2 64 0 2005 2006 2007 2008 42

Total GVA

2005 2005

2008

% GVA pa in Transport & communications 8

1

2

2007

2011

CHART 9: GVA in TRANSPORT & COMMS

Total GVA

% pa 3 4 3

2

2006

2010

UK

NW AND UK GVA IN TRANSPORT COMMUNICATIONS

Total GVA

3

3

0

2009

NW

21

2011

UK 14.1 6.1 15.9 8.1 27.9 23.3

Contents The World Economy

1

The UK Economy

3

Northwest Economy Outlook

6

Northwest and UK GDP 2004 – 2011

10

Northwest Sector Output

11

Northwest Sector Output 2004 – 2011

15

Northwest Expenditure

16

Components of Northwest Expenditure 2004 – 2011

17

Northwest Labour Markets

18

Northwest Labour Markets 2004 – 2011

20

Northwest Sector Employment 2004 – 2011

21

Northwest Prices and Earnings

22

Northwest Prices and Earnings 2004 – 2011

23

Northwest Construction and Housing

24

8 6 4

The World Economy

2 0 2005

2006

2007

2008 NW

KEY POINTS •

GDP growth in the major developed economies is expected to be weaker in 2008 than in 2007, with the US economy most adversely affected. The current consensus view is that US growth will start to recover again towards the end of 2008.

•

Monetary policy has been relaxed considerably in the US following the credit crisis, and interest rates are unlikely to be cut much further. In contrast, the ECB has been reluctant to lower interest rates to ease policy in the face of inflationary pressures. However, some reduction in euro-zone rates is expected through 2008 as growth slows.

•

The price of oil and food commodities has risen sharply since September 2007, with oil reaching around $140 a barrel in early June. Weaker world growth in 2008 and 2009 will curb demand pressures on oil in particular, and some further reduction in price can be anticipated over the next few years from the average of $115 per barrel assumed for 2008.

THE US WILL LEAD THE SLOWDOWN IN WORLD GROWTH OVER 2008-09 In the US, it took some time for the increasing malaise of the financial sector to filter through into the ‘real’ economy.

Although the housing market had already started to turn before the credit crisis, it was only in the last two quarters of 2007 that quarterly GDP growth showed any signs of weakening. The repricing of risk and subsequent impacts still has some way to go. The housing market is still experiencing large price falls and unemployment is rising, both of which are affecting consumer confidence.

Given the flexibility of the US labour market, further rises in unemployment can be expected as companies shed jobs in a bid to reduce costs in the face of weaker demand.

2009

2010

2011

UK

In Japan, there is now clear evidence of a general weakening in activity, but there is also a sense that the stop-goGVA cycle of growth has now ended and that the in Financial & Business Services economy is returning to normality. This is reflected in the % pa increase in inflation, which is expected to bring an end 10 to the8 period of falling prices sometime in 2009. The US slowdown and the dollar’s depreciation against the yen 6 have exacerbated the downturn by reducing demand 4 for exports with the result that industrial output has 2 slumped at the same time that consumer demand is also 0 weakening.

But the downturn in Japan is not as steep as 2005 2006 2007 2008 2009 2010 2011 in the US, so the expectation is also of a more shallow NW UK recovery in Japan in 2009.

In the euro-zone, there has been a slight deceleration in growth and GVA quite a sharp downgrading of expectations in Public and Other Services since the autumn, consistent with conditions of high interest rates, slowing world demand and a strong euro. In % pa 3 Germany, this is expected to hit exports, where confidence has fallen amid signs now that some exporters are facing falling 2US demand. The domestic sector appears more insulated, and so this is expected to drive activity in 1 Germany over 2008-09. In France, the manufacturing sector0has been showing some signs of resilience and so only a 2005 moderate expected the next two 2006slowdown 2007 is2008 2009over2010 2011 years. In Italy, neither the traded orUKdomestic sectors are NW expected to help improve Italy’s fortunes over the current cycle. Manufacturing growth is weakening while consumer spending is also on a downward trend as energy prices increase and confidence declines.

CHART 1: PROSPECTS FOR GROWTH IN THE CHART 1: PROSPECTS FOR GROWTH IN THE

WORLD ECONOMY WORLD ECONOMY % pa 4 3

The key to recovery in the US will lie with the response of consumers to the marked loosening of monetary policy since last summer, and to a significant package of tax rebates so long as these are spent and not saved. We currently expect this response to start to occur towards the latter part of 2008, resulting in a moderate upturn in growth in 2009.

2 1 0 2006Q1

2007Q1 US

Japan

2008Q1

2009Q1

Eurozone

UK

Source: OECD Economic Outlook (February 2008) and Consensus Forecasts (April 2008).

Page 1

MODEST INTEREST RATE CUTS ARE POSSIBLE IN THE EURO-ZONE In the US, monetary policy has been substantially loosened since September 2007 with a series of large interest rate cuts having taken place in the first few months of 2008. The Federal Reserve is unlikely to cut interest rates much further unless there is evidence of further weakening in the economy. In Japan, the slight rise in interest rates after many years at zero level is another sign of normality returning to the economy, although the recent weakening of demand makes it unlikely that any further increases will be forthcoming in the near future.

In the euro-zone, the ECB has been reluctant to ease policy in the face of inflationary pressures. The ECB’s mandate is much more inflation-focussed than that of the Federal Reserve, and there are signs that present interest rates are resulting in sharp housing-led difficulties in some countries. And as most countries in the euro-zone are expected to experience at least slower growth over 2008-09, interest rates in the zone are expected to be cut modestly in 2008.

Since September, the dollar has seen a marked decline against the euro reflecting the divergence in monetary policy, as a 3 pp gap between US and euro-zone interest rates opened up in the space of half a year. The dollar gained ground against sterling since September, reflecting increasing concern about the UK economy, although it is still trading at around two dollars to the pound. Interest rate cuts appear more likely in the euro-zone than the UK in the short term, which might help to cushion the dollar’s decline against the euro.

OIL AND FOOD PRICES HAVE RISEN STRONGLY Oil prices have risen strongly from around $40 in 2004, and then from around $75 in September 2007, to reach a new high close to $140 per barrel early in June 2008, driven by tight demand conditions, increased sensitivity to news about supply shortages and OPEC production levels, and by the weakness of the dollar. Given the prospect of slower world economic growth in 2008, demand for oil is expected to fall slightly, with a rebalancing of demand towards China, India and the Middle East. We currently assume the price of oil will average $115 per barrel in 2008 before falling back further as a result of increased energy,

enhanced supplies, and the running down of speculative stocks. But a return to oil in a trading range close to $40 per barrel seen between 1987 and 2004 is not to be expected.

For some years now, metals and minerals prices have dominated the headlines but the recent focus has been on food prices, which have been on an accelerating path since their low-point in 2005. Food prices have been driven up by poor harvests, the increasing use of crops for bio-fuels, and by strengthening demand in some fastgrowing developing countries. In response, some producer countries have imposed export restrictions to meet domestic demand, and this is forcing prices up further.

The prospects for the short term are not good, with further inflationary pressures expected while the oil price remains high, and producers adjust to the higher levels of demand.

Food price increases are expected to moderate gradually, however, and to come down to single-digit inflation by 2010.

POINTS TO WATCH • How long it will take for confidence and liquidity to return to international financial markets.

• How US consumers, and the US economy in general, respond later this year to the rate cuts and fiscal stimulus.

•

How far growth in the developing countries (particularly Brazil, Russia, India and China - the BRIC countries) will continue to support world growth in the face of stronger inflationary pressures from which they are unlikely to be immune.

•

More generally, how far the monetary authorities in advanced countries manage to strike a successful balance between containing inflation and hindering recovery from serious credit and oil price shocks

• Whether the US dollar recovers from its present weakness, thereby improving the competitive position of those exporting to the US.

Page 2

-1 -2 2005

2006

2007

2008 NW

2009

2010

2011

UK

The UK Economy % pa 4

KEY POINTS 3

•

2 Although the UK economy remained relatively strong in 1 the first quarter of 2008, we expect growth for 2008 0 as a whole to slow from just over 3% in 2007 to 1.5%.

-1 Growth in 2009 is likely to be slightly slower, at 1.3%, 2005 2006 2007 2008 2009 2010 2011 although this outcomeNWfor theUKyear as a whole masks our view that economic recovery will begin during the year. The slowdown in 2008 is likely to be most marked in financial & business services and in construction.

Output in construction is likely to fall nationally in 2009

•

Input and output price inflation have picked up, driven by % higher commodity prices, especially oil and food. pa 5 Consumer price inflation has been steadily rising above 4 its 2% target rate since October 2007 to reach 3.3% by 3 May 2008.

•

Interest rates have been cut three times since 1 September 2007 to bolster confidence in the financial 0 markets the rest2007 of the2008 economy. do not 2005and 2006 2009 We 2010 2011 expect UK interest rates will be reduced further despite NW UK the weakening in the economy, due to concern about the strength of underlying inflationary pressures. On the contrary, there is a risk that the next moves could be upwards especially if earnings increase unduly.

GVA in Distribution, hotel & catering

2

it remains at that rate. The growth in average earnings, excluding bonuses, is still 33⁄4% year-on-year. Activity in the housing market has slowed sharply. The number of mortgage approvals has slumped since September 2007, while house-prices are falling. Consumer confidence has weakened sharply in recent months, although this is yet to be reflected consistently in data for retail sales. However, many retailers have reported difficult trading conditions and issued profit warnings.

The picture for business is mixed according to business surveys. On current trading conditions and the short-term outlook, the CBI’s April 2008 Industrial Trends Survey showed confidence falling further in January and April, but the EEF’s March survey reported record growth and an upbeat outlook among its members. Investment intentions remained firmly negative in the CBI survey, but remained strong in the EEF survey. At the same time, new orders for construction work fell for the first time in a decade in March according to the Chartered Institute of Purchasing and Supply, which suggests that activity in construction is now contracting; and Purchasing Managers Index for services in May shows worrying prospects for output and employment across what is now much of the economy.

CHART 2: OUTPUT AND EMPLOYMENT GROWTH

PROSPECTS FOR THE UK CHART 2: OUTPUT AND EMPLOYMENT GROWTH

PROSPECTS FOR THE UK

THE SLOWDOWN IN 2008 IS NOW EXPECTED TO BE LONGER AND MORE PRONOUNCED

% pa 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

2006

2007

2008 GVA

2009

2010

2011

EMP

Source: Panel Forecasts, Spring 2008.

GROWTH NOW APPEARS TO BE SLOWING After averaging 3⁄4% in 2007, quarterly GDP growth in the UK slipped to just under 1⁄2% in the first quarter of this year according to the preliminary estimate. Growth in distribution was surprisingly strong, while manufacturing output increased for the first time since the second quarter of 2007. But growth in financial & business services and construction showed a marked slowdown.

Headline average annual earnings growth eased back to 33⁄4% in 2007Q4 and early data for 2008 indicate that

In our Autumn 2007 forecast, we were expecting GDP growth to slow to just over 2% in 2008 due to marked slowdowns in investment and household spending as a result of the economic uncertainty created by the credit crisis. Construction and financial & business services were expected to see the sharpest slowdown. Modest pick-ups in investment and household spending were expected to support a recovery in 2009 and 2010.

The basic story remains the same, but we have revised down our projections for 2008 and 2009 further, and we do not expect recovery to begin until perhaps the middle of next year rather than around its beginning.

The adjustment to the financial crisis is still far from over.

The US economy may now be in recession, and signs that Europe is being affected are beginning to emerge.

Although the slowdown in activity in the UK in the first quarter of this year has yet to come through clearly in other data, we expect demand to weaken over the

Page 3

coming months and that the slowdown will become obvious by the middle of the year. Recent projections and announcements on major job losses in the City have dented optimism, while high profile labour disputes are creating disruption and adding to uncertainty. Pay disputes in the public sector threaten to create upward inflationary pressure. At the same time, real disposable incomes are being squeezed by higher energy and food bills. Many households are expected to face substantial increases in mortgage repayments as their current deals expire over the coming months.

In April, the Bank of England unveiled plans to offer ÂŁ50bn worth of secure government bonds to lenders in return for their riskier mortgage-backed debts, in a bid to boost liquidity in the financial markets and ease the current crisis. However, while this is helping to assure liquidity for lenders, it appears that homeowners and other borrowers will not benefit from lower interest rates for some time.

This will prolong the downturn and we now do not expect conditions to improve until around the middle of next year.

We are forecasting GDP growth of 1.5% in 2008 and 1.3% in 2009. Growth is expected to recover to trend in 2010, but will not peak until 2011 or perhaps later.

CONSTRUCTION COULD BE THE WORST-AFFECTED SECTOR Sharp slowdowns in household and investment spending will drive the outturn for 2008 and this will be reflected across sectors. Output in construction is expected to be badly hit by much-reduced housing and commercial property investment holding back, if not cancelling, starts against a bedrock of continuing work. Output in total is expected to start falling about now and not to begin to pick up recover until mid-2009, and that total output in construction in 2009 as a whole will be lower than in 2008.

As real disposable income is squeezed, households are expected to cut back on discretionary spending.

Consequently, the distribution sector is expected to see considerably slower growth in 2008 and 2009.

Other service sectors will also see considerably slower growth in 2008 and 2009, with the outturn for transport & communications reflecting the impact of slower activity on demand for transport services.

The financial sector in particular remains caught up in the

credit crisis and entrenched in its cautious and defensive position as it seeks to restore normality and profitability.

Growth in the sector is expected to pick up by the end of 2008, but it is not likely to return to pre-crisis growth rates until 2010 at the earliest. Manufacturing has held up so far, but it is only a matter of time before it is affected by the slowdown in world markets despite help in euro markets from weaker sterling.

We expect output growth in the economy as a whole to have weakened in the second quarter of 2008 and to slow further through the second half of the year before beginning to recover through 2009. However, the outcome is that UK output growth in total in 2009 as whole will be weaker than in 2008.

THE BANK OF ENGLAND MUST MANAGE RISING INFLATION AS GROWTH SLOWS Input and output price inflation have picked up considerably since September 2007, driven by higher commodity prices, especially for oil and food. Panel members observe that there are also many manufacturing firms that have so far absorbed cost pressures, but will soon have to post higher prices, adding to inflationary pressures.

Although consumer price inflation has not picked up to the same extent, it is now well above the 2% target rate, and the Panel reports that, after a number of years in which the price of goods sourced from the Far East has been falling as purchasers have been able to take advantage of intense competition among producers, cost pressures in China and elsewhere means that even tough negotiations now often result in higher import prices. In addition, Panel members point out that although it is still possible to recruit willing young Eastern Europeans for wages that have helped to contain wage inflation, net flows of immigration from Accession Countries seem to be shifting, perhaps because of weaker sterling and increasing opportunities at home. So, this market mechanism that has also helped to contain UK inflation is also being eroded.

Despite these inflationary pressures, the Bank of England has made three 1â „4pp cuts in its base rate since September 2007 to bolster confidence in the financial markets and the rest of the economy, and to prevent too sharp a slowdown

Page 4

in economic activity. In June, the base rate was held at 5%. The softening of growth and demand in the short term should ease some inflationary pressures, but the continued strength of commodity prices will apply upward pressure.

While the Bank remains under some pressure to cut rates further to support borrowers and lenders, we expect the strength of underlying inflationary pressures to be sufficient to rule out any further cuts in interest rates until the impact of higher oil and food prices on the consumer price index has worked through. Supporting this view, and without ruling out cuts, the Bank of England Governor has made clear the Bank’s determination to recover its inflation target, warning that the Monetary Policy Committee is prepared to take whatever action is needed to do this, for instance if pressure on earnings begins to rise. While there is therefore a distinct risk that the next move in interest rates will be upwards, our assumption is that rates will be held, and that a fall will only occur when the recovery is well-established, perhaps by mid 2010.

Already shaken, according to surveys, this could weaken further, especially if the housing market were to weaken sharply.

•

Underlying inflationary pressures remain and the effect could be to put upward pressure on wage settlements.

If so, this would further limit any remaining scope the Bank of England may have to reduce interest rates, and it would increase the risk that the next moves could be upwards.

RISKS TO THE UK FORECAST A key risk is that measures to bring stability to the financial markets will prove to be insufficient and liquidity will take a longer to return. This would prolong the period of tighter lending conditions and also the slowdown in real activity.

Another risk is that inflation continues to strengthen and acts to delay the point at which the Bank feels it can cut rates to support a recovery. This could lead to a unwelcome combination of high inflation and low growth, and even to higher interest rates.

House-price inflation is starting to turn negative. Sharper falls in house prices remain a key risk to consumer confidence, which could be expected to lead to more pronounced cuts in discretionary spending.

POINTS TO WATCH •

Confidence seems to be weakening quite sharply in commercial property and housing, and possibly in many services. A marked downturn in services could translate quickly into higher unemployment.

• Recent data on retail sales has been mixed, but household spending, particularly discretionary spending can depend greatly on consumer confidence.

Page 5

Northwest Economy Outlook KEY POINTS

and manufacturing.

•

We estimate that the Northwest economy grew by just over 21⁄2% pa in 2007, supported by continued strong growth in financial & business services and transport & communications. We expect its growth to slow sharply to 1.7% in 2008, alongside the slowdown in the world and UK economies resulting mainly from a combination of high oil prices and turbulence in credit markets.

•

Although we expect growth in the region to begin to recover in the course of 2009, the outcome for the year as a whole is likely to be slower growth than in 2008. Growth in 2010 is still expected to be modest, at 2.2%, but to strengthen significantly in 2011, mirroring the UK profile.

Table 1 shows our new forecast for GVA in the Northwest and the UK, together with forecasts for some other regions for comparative purposes. The global credit crisis was with us at the time we prepared our last forecast in Autumn 2007, but there was then no evidence to indicate the scale of its impact. Our view then was that growth in the Northwest would ease back in 2008 as growth in financial & business services in particular slowed, before recovering slightly in 2009, and strengthening further in 2010. We also expected growth in the Northwest in the recovery period would be weaker than that in the UK as a whole.

•

All sectors are expected to experience slower growth in 2008 than in 2007 with the exception of government and other services. The sharpest slowdown is likely to occur in financial & business services, although this is still expected to grow at a faster rate than any other sector.

•

Overall employment in the Northwest rose by just over 1% in 2007, reversing the fall registered in 2006. This shift reflects a large number of jobs created in financial & business services after a pause in employment growth in the sector in 2006. Manufacturing and distribution hotels & catering saw employment fall further.

•

The outlook is that jobs growth in total will slow to around 0.2% in 2008, but fall slightly in 2009. Jobs growth should become established again in 2010 as the upturn in the economic cycle becomes established.

Financial & business services will provide the majority of the new jobs to 2011.

OUTPUT GROWTH WILL SLOW SHARPLY IN 2008 We estimate that the Northwest economy grew by 2.75-3% pa in 2006 and 2007, a slightly slower rate of growth than in the UK as a whole. Growth in the Northwest was supported by continued strong growth in financial & business services and in transport & communications.

Growth in distribution, hotels & catering was also stronger than the overall growth in the economy, despite falls in employment. In contrast, we estimate that there was only weak growth in government & other services

This remains our broad view, but we have revised down our expectations for growth in 2008, to 1.7%, pushed back the timing of the recovery into 2009, and downgraded its strength in 2010. It remains our view that the impact of the credit and oil price shocks will be a period of slower growth for the Northwest economy, rather than a recession.

TABLE 1: REAL GROWTH (% pa)

2008

2009

2010

2011

2.1 2.2 2.7 2.6 2.4

2.5 2.6 3.0 3.1 2.8

2.3 2.5 3.2 3.0 2.6

1.5 1.3

2.2 2.4

2.9 3.3

CE Forecast as at February 2008 NW W.Mids London S.East UK

1.7 1.6 1.6 1.8 1.8

Panel Forecast, Spring 2008 NW UK

1.7 1.5

Source(s): Panel Forecasts Spring 2008 and Cambridge Econometrics, February 2008.

All sectors are expected to experience slower growth in 2008 than in 2007, with the exception of government and other services. The sharpest slowdown is likely to be in financial & business services, although it will still grow at a faster rate than any other sector.

Page 6

We still think general prospects for growth in 2008 and 2009 are likely to be stronger in the Northwest than the UK mainly because direct and wider impacts of the financial sector crisis are likely to be the most marked in London and its neighbouring regions. Thereafter, the underlying strength of the UK economy is likely to reassert itself. As a result, the gap in the level of GVA per head in the Northwest and UK economies is likely to be reduced in the short term, albeit modestly, but then to begin to widen again.

3: OUTPUTAND AND EMPLOYMENT CHART CHART 3: OUTPUT EMPLOYMENT GROWTH GROWTH PROSPECTS FOR THE NORTH WEST

PROSPECTS FOR THE NORTHWEST

within the region, prospects in Greater Manchester tend to mirror those for the Northwest as a whole.

TABLE 2: REAL GVA GROWTH WITHIN THE NORTHWEST (% pa)

2008

2009

2010

2011

Cheshire Cumbria G.Manchester Lancashire Merseyside Northwest

2.2 1.8 2.6 3.3 1.5 1.4 2.0 2.7 1.7 1.6 2.3 3.0 1.5 1.3 2.0 2.7 1.6 1.4 2.0 2.7 1.7 1.5 2.2 CHART 4: RELATIVE GVA PER HEAD IN 2.9 NORTHWEST (NOMINAL

Source(s): Panel Forecasts Spring 2008 and 90 Cambridge Econometrics.

% pa 4

89 BUSINESS CONFIDENCE HAS FALLEN SHARPLY, PARTICULARLY AMONG MANUFACTURERS 88

3 2 1 0 -1

2006

2007

2008

2009

GVA

2010

2011

EMP

Source: Panel Forecasts, Spring 2008.

CHART 5: PROSPECTS FOR OUTPUT GROWTH IN THE NORTH WEST

CHART 4: RELATIVE GVA PER HEAD IN NORTHWEST GVA PER HEAD IN NORTHWEST (NOMINAL PRICES, UK=100) % 4:paRELATIVE CHART (NOMINAL PRICES, UK = 100) 5 90

4 3

89 88

2 1 0

87 86

2004

2006

2005

2007 2008 Manufacturing 2006

2007

2009 Services 2008

2009

2010

2010

2011

2011

Source: Regional Accounts and Panel Forecasts, Spring 2008.

CHART 7: GVA IN CONSTRUCTION

Based on the industrial structures of the Northwest’s CHART 6: GVA IN MANUFACTURING % pa sub-regional economies, and on the relative historical 4 % pa performance of sectors in different parts of the region 33 2 (which 21 may not always be a good guide to the future, 10 especially in smaller economies that can be more subject -1 0 to local developments), growth in2010 2008 to be 2005 2006 2007we expect 2008 2009 2011 -1 strongest in Cheshire andNW GreaterUK Manchester and weakest -2 in Lancashire.

Through the forecast period, 2010 prospects 2005 2006 2007 2008 2009 2011are most favourable in Cheshire while, given its relative weight NW UK CHART 9: GVA in TRANSPORT & COMMS

CHART 8: GVA in DIST., HOTELS & CATERING

2009

% pa

The fall in confidence among Northwest manufacturers 3 reflects reports of a fall in domestic orders and continued 2 weakness in export orders.1 Nevertheless, a positive 0 balance of manufacturers still expects turnover to increase -1 in the short term, although there is much less confidence -2 that this will improve profits.

The proportion 2005 2006 2007of companies 2008 2009 20 reporting that pay settlements are creating pressure to NW UK raise prices increased at the beginning of 2008, and the impact of raw material prices continues to be a cause of concern for the sector. As a result, the balance of manufacturers in the Northwest expects to reduce employment in the short term. In contrast, nationally a CHART 8: GVA in DIST., HOTELS & CATERING small balance expects to raise employment in the short % pa 5 term.

4

Services in the Northwest are also 3 less confident about short-term profitability than they2were, with a balance 1 of firms reporting at the start of 2008 that export orders 0 had fallen. Nevertheless, the expectation for increased 2005 2006 2007 2008 employment in the short term remains at levels seen for NW most of the last two years.

200 UK

CHART 10: GVA in FINANCIAL & BUS. SERVICES

% pa 10

% pa 8 6

87 The regular survey of businesses by the British Chambers of Commerce suggests86that confidence among both 2004 in 2005 2006 2007fell 2008 manufacturers and service firms the Northwest at the end of 2007 and fell further in the first quarter of 2008.

While confidence among services in the Northwest is similar to that for the sector in UK as whole, confidence among Northwest manufacturersCHART is much 6: GVA weaker.

IN MANUFACTURING

8 6

Page 7

GROWTH WILL SLOW SHARPLY IN 2008 AND WE MAY NOT SEE A STRONG RECOVERY UNTIL 2011 It is estimated that output growth in the Northwest in 2007 was slightly weaker than in 2006 at 2.7% after 2.8%.

However, growth is expected to slow sharply in 2008 resulting in a figure for the year as a whole of just 1.7%.

The sharpest slowdown is expected in financial & business services, but all sectors are expected to see weaker growth in 2008 than in 2007.

Nationally, growth is expected to start to recover modestly around the middle of 2009, and growth in 2009 as a whole is expected to be weaker than in 2008. We expect this pattern will be shared in the Northwest and that its growth in 2009 will be 1.5%. It is not until 2010 that we think growth will be re-established in all major sectors in the region, taking overall growth for the year to 2.2%, somewhat slower than 2.4% in the UK. However, it is not until 2011 that the strength of the recovery in the region and in the UK is expected to result in ‘above trend’ growth as slack in potential output that was unrealised in the downturn is made good.

lower cost places, including the Northwest.

The BCC business survey indicates that the performance of the manufacturing sector in the Northwest weakened sharply in the second half of 2007, and growth for the year as a whole is estimated to have been just 1%. Overall, output is expected to see modest increases in 2008 and 2009 with growth strengthening in 2010 as global demand begins to pick up, and peaking in 2011 at 2.4%.

Growth in the Northwest distribution, hotels & catering sector is expected to slow sharply to 1.5% in 2008 as consumer spending in the region slows in response to a weak housing market, tighter credit markets, current levels of debt and slower employment growth. Currently, saving rates in the Northwest are among the weakest in the UK, and the region has also seen some of the largest falls in house prices in the early part of 2008.

Data from Nationwide report house prices in the Northwest in the first quarter of 2008 were 1⁄4% lower than a year earlier, while for the UK as a whole prices were 21⁄4% CHART(although 3: OUTPUT AND EMPLOYMENT higher more recent data show house prices GROWTH PROSPECTS FOR THE NORTH WEST falling in the UK). Northern Ireland was the only other Much of the explanation for the relative performance region where prices were lower than they were a year of the Northwest economy compared to the UK comes % paearlier. In line with the sector nationally, we expect that from the performance of the financial & business services 4 growth in distribution, hotels & catering will slow further to sector, and everything that depends on this as a significant3 1.3% in 2009, before recovering to 2.2% in 2010 and 3.1% purchaser of other services, and as a major generator of 2 in 2011. earned income at the disposal of its employees.

1 Output growth in public services has been weak in recent Panel members say that the sector in the Northwest has 0 years and is now thought to have grown more slowly than 2007 2008 not experienced the sharp contraction in some kinds the UK as a whole since 2009 2005. We2010 expect 2011 future growth -1 in 2006 GVA EMP of activity so far seen mainly in the financial sector in to be broadly in line with that nationally, on the assumption London. On the contrary, its position is protected to some that growth will strengthen through to 2011 when it might extent because of its greater dependence on local and reach 2.3%. regional rather than national and international markets.

CHART 5: PROSPECTS FOR OUTPUT GROWTH Nevertheless, some reduction in the strong growth seen in CHART 5: PROSPECTS FOR OUTPUT GROWTH IN THE NORTH WEST

IN THE NORTHWEST recent years would have been expected anyway because % pa of the downturn in the economy.

The outlook for growth in this key sector is just over 3% in 2008 and 2.3% in 2009. The strength of its upturn in 2010 and 2011 is similarly expected to be less pronounced than in the UK because firms in the region are less likely to share in the expected recovery in various London based markets and services that were more severely affected in the downturn. More generally, there is some prospect of more support operations being transferred from London to

5 4 3 2 1 0

2006

2007 2008 Manufacturing

2009 Services

2010

2011

Source: Panel Forecasts, Spring 2008.

Page 8 CHART 7: GVA IN CONSTRUCTION

EMPLOYMENT IS SET TO FALL IN 2009 Overall employment in the Northwest rose by just over 1% in 2007, overturning the fall registered in 2006. The outcome was dominated by a large number of jobs created in financial & business services. Manufacturing and distribution, hotels & catering saw further job losses in 2007. While the rate of decline in manufacturing employment was, at 13⁄4%, much weaker than occurred since 2000, 2007 was the third consecutive year when employment in distribution, hotels & catering fell.

The outlook is that total employment growth in the Northwest will slow to around 0.3% in 2008, before falling by 0.1% in 2009 as employers adjust to the slowdown in 2008 and even weaker prospects in 2009. Employment is expected to rise again in 2010, albeit modestly, but to strengthen to 1.1% in 2011. Financial & business services will provide the majority of the new jobs to 2011. However, this year and next jobs growth in this sector is expected to average just 3⁄4% pa, and even in 2010-11 the rate of growth of employment in financial & business services is expected to be much lower than the average of 31⁄2% pa achieved since 2004.

Employment in distribution, hotels & catering has fallen in recent years and, while some increase has occurred that should lead to employment in 2008 being higher than in 2007, further job losses are expected in the sector in 2009. Construction employment is also likely to register falls in 2009, and the long-term decline in manufacturing employment is also expected to quicken in 2009.

POINTS TO WATCH •

We continue to assume that financial & business services in the Northwest will be affected by the slowdown in the sector in the UK as a whole, but that the effect in the region will be less than in the UK. It will be important to monitor events in the sector through 2008 to see if this is borne out.

•

Consumer confidence will be an important factor in a region with a relatively poor saving rate. Confidence could weaken sharply in response to forthcoming news, particularly that relating to the housing market, with potential impacts on employment as well as output growth.

Page 9

Northwest and UK GDP 2004 – 2011 TABLE 3: SUMMARY DATA AND FORECASTS FOR THE NORTHWEST Unit as indicated and % growth pa

2004 2005 2006 2007 2008 2009 2010 2011

GVA (£2003m)

Consumer Spending (£2003m)

Unemployment Rate (%)

100,897 3.3 102,319 1.4 105,213 2.8 107,972 2.6 109,829 1.7 111,505 1.5 113,985 2.2 117,297 2.9

79,409 2.8 80,367 1.2 81,821 1.8 84,288 3.0 85,390 1.3 86,409 1.2 88,197 2.1 90,725 2.9

2.8 -12.4 2.9 2.1 3.3 14.1 3.1 -5.6 3.2 1.9 3.3 4.7 3.6 7.8 3.6 0.7

Source(s): Panel Forecasts, Spring 2008.

TABLE 4: NORTHWEST AND UK GVA Unit as indicated and % growth pa

2004 2005 2006 2007 2008 2009 2010 2011

NW GVA (£2003m)

UK GVA (£2003m)

Nominal GVA per head (UK = 100)

100,897 3.3 102,319 1.4 105,213 2.8 107,972 2.6 109,829 1.7 111,505 1.5 113,985 2.2 117,297 2.9

1,007,437 3.5 1,028,737 2.1 1,060,163 3.1 1,093,583 3.2 1,109,675 1.5 1,124,451 1.3 1,150,910 2.4 1,188,578 3.3

88.9 0.6 88.4 -0.6 88.6 0.3 88.3 -0.4 88.3 0.0 87.8 -0.5 87.6 -0.3 88 0.5

Source(s): Panel Forecasts, Spring 2008.

Page 10

Northwest Sector Output KEY POINTS • Confidence among manufacturers fell sharply at the beginning of 2008 and little growth is expected for output by the sector in the year as a whole.

for the aircraft may have to be outsourced to lower cost countries or directly into the dollar zone. On the other hand, BAE’s military output is protected by long-term contracts with governments.

There are mixed fortunes for the three global • Growth in financial & business services is expected pharmaceutical manufacturers with operations in the to slow sharply in 2008. However, growth for the year MPLOYMENT as a whole could still average over 3%, which would be North West: Novartis, Eli Lilly and Astra Zeneca. Novartis FOR THE NORTH WEST CHART 4: RELATIVE GVA PER HEAD IN NORTHWEST (NOMINAL PRICES, UK=100) has announced plans to cut 130 jobs at its Speke plant stronger than the UK. The type of work undertaken in where it produces the flu vaccine Fluvirin. The company is the sector in the Northwest will protect it in 2008 and actually expecting to increase output following its £100m 2009 but restrict the strength of the recovery expected 90 investment in the plant. Eli Lilly is also seeing increasing in 2010 and 2011.

89demand for its animal health products, which it produces • Growth in construction output is estimated to have at Speke. In contrast, Astra Zeneca recently announced been weak in recent years. The effect of the credit 88300 job losses at its Wilmslow R&D facility as the company crisis could be to weaken prospects further leading to seeks to restructure its worldwide R&D activities. a fall in output in 2009.

87

08

GVA

2009 2010 2011 MANUFACTURING:

Confidence fell sharply at the EMP beginning of 2008 and little growth is expected before 2010

Manufacturing in the Northwest has performed better than the UK average for a number of years. But, early evidence CTS FOR OUTPUT GROWTH IN THE NORTH WEST for prospects in 2008 is mixed. The regular survey of businesses by the British Chambers of Commerce reported that confidence among manufacturers fell at the end of 2007 and fell further in the first quarter of 2008 and that confidence among manufacturers in the Northwest was weaker than in the UK as a whole. At the same time EEF North West, says that North West manufacturers have reported good results for the first quarter of 2008 and that order books are favourable.

2008 acturing

2009 Services

2010

2011

We expect that manufacturers in the Northwest will be affected by the global slowdown in demand, and with surveys reporting that confidence has weakened sharply recently, that the impact will be greater than experienced in the UK as a whole. Overall, little growth is expected in 2008 or 2009. Growth is expected to recover to 11⁄2% in ONSTRUCTION 2010 and to peak at 21⁄4-21⁄2% in 2010.

NW

The weak dollar is causing difficulties for the region’s global manufactures. Within engineering, BAE could reduce employment at its Broughton plant where it makes the wings for the Airbus A380. EADS, the European which2011 produces the Airbus A380, has 2008 conglomerate 2009 2010 warned that, as a result of the weak dollar, production UK

T & COMMS

In motor vehicles, although it was announced in 2007 that Vauxhall’s Port plant secured of 2004 Ellesmere 2005 2006 2007 had 2008 2009production 2010 2011 the new Astra, there are fears that jobs may still be lost at the plant as a result of the worldwide restructuring that the parent company General Motors is undertaking.

86

CHART 6: CHART GVA IN MANUFACTURING 6: GVA IN MANUFACTURING % pa 3 2 1 0 -1 -2 2005

2006

2007

2008 NW

2009

2010

2011

UK

Source: Panel Forecasts, Spring 2008.

CONSTRUCTION: the legacy of the credit crisis could be lower output in 2009 8: GVA in DIST., HOTELS & CATERING ConstructionCHART output is expected to grow by 11⁄2% in 2008, a%slightly slower rate than is estimated for 2007 as pa 5 a whole. The effects of the credit squeeze are expected 4 to put pressure on developers in the region, though this 3 is likely to be through delaying new projects that might 2 looking to start in the second half of 2008 or have been 2009 rather 1 than stopping work that is currently ongoing.

That said,0 housing-related work is being downscaled, with 2005 2009 housing 2010 some in the sector2006 ceasing2007 work on2008 their current

NW

UK

Page 11 CHART 10: GVA in FINANCIAL & BUS. SERVICES

2011

CHART 3: OUTPUT AND EMPLOYMENT developments as a result primarily of the credit crisis, NORTH WEST GROWTH PROSPECTS FOR THE in but also because of the downturn the housing market.

Some lay-offs are now occurring. As a result, we expect % pa output in 2009 to be lower than 2008, by 1⁄4%, and for growth to remain relatively modest then to 2011.

4

3 Work on the Omega development at Warrington is 2 expected to start in the summer 2008. Although this is slightly later than had been intended, the developers, 1 the Millar Group, say that the turbulence in the credit 0 markets is not expected to cause further delay. It had been 2006 2007 2008 2009 2010 2011 -1 intended that the first phase of the development would be GVA EMP operational by summer 2009.

SERVICES: Growth will slow sharply in 2008, but will CHART 4: RELATIVE GVA PER HEAD IN NO remain relatively strong The slowdown in growth in 2008 is expected to be much sharper among the services 90 than manufacturing.

Nevertheless, services will continue to provide the greatest 89 support to growth in the Northwest.

88

DISTRIBUTION, HOTELS AND CATERING: Growth will slow sharply in 2008 and 2009 as87consumers rein back spending 86

2006 2007 Growth in this sector is expected to slow2004 sharply2005 to 11⁄2% 1 in 2008 and 1 ⁄4% in 2009, as consumer spending in the region slows in response to a weak housing market, Among the larger new plans that have been submitted tighter credit markets, current levels of debt and slower recently are those by Grangefield Estates to develop a 4m employment growth. Currently, saving rates in the sq. ft., 40 acre mixed-use development the Ardwick area WEST GROWTH IN THE NORTH CHART 5: PROSPECTS FOR OUTPUT in CHART 6: GVA IN MANUFAC the of Manchester. The plans are part of the city’s regeneration Northwest are among the weakest in the UK, and region has also seen some of the largest falls in house % pa programme and have been developed together with % pa prices in the early part of 2008.

In line with the sector Manchester City Council. In addition to the other facilities 3 5 nationally, we expect that growth will recover in 2010 and there is also provision for 2,000 new homes.

2 4 2011, but it will be slightly weaker than1is expected for the 3 UK as a whole.

At a much earlier stage in the planning process, and more 0 2 long-term in focus, is the ‘Liverpool Waters’ development -1 At present clothing retailing at the top and bottom of being1 planned by Peel Holdings on derelict docklands to -2 the range is holding up, but the middle of the market 2005 2006 is 2007 20 the west of the city centre.

The complete scheme could 0 struggling, and high-ticket items linked to homes are 2006 2007 2008 2009 2010 2011 take at least 30 years to complete and would represent an NW Manufacturing Services moving very slowly. investment of more than £5.5bn. A similar slightly smaller

investemnet is being considered by Peel for Warrington, alongside the Ship Canal.

CHART 7: GVA IN CONSTRUCTION

CHART 7: GVA IN CONSTRUCTION

% pa 4 3 2 1 0 -1 2005

2006

2007

2008 NW

2009 UK

Source: Panel Forecasts, Spring 2008.

CHART 9: GVA in TRANSPORT & COMMS

% pa 8 6 4 2

2010

2011

Despite what seem to be increasingly difficult trading conditions at present, there are a number of major developments coming on stream in the sector. In Liverpool, Grosvenor’s Paradise Street shopping CHART 8: GVA in DIST., H development known as ‘Liverpool One’ is progressing, and % pa and two the first part of the scheme, containing 70 shops 5 department stores, is due to open at the end of May, with 4 spokesmen talking about taking a long view well beyond 3 present difficulties. The entire development is expected to 2 be open by September 2008 in time for Christmas.

1

The city’s hotel sector has seen strong performance 0 recently. The Deloitte Hotel Benchmark survey2005 showed2006 2007 the average revenue per hotel room available in the city increased in 2007. The expectation is that this will increase further in 2008 as the city celebrates being the European Capital of Culture. If so, this will make up some of the CHART 10: GVA in FINANCIAL & gap in average revenues for Liverpool compared with Manchester. However, the Panel reports% that pa clients in 10 8 6 4 2

Page 12

GROWTH PROSPECTS FOR THE NORTH WEST

CHART 4: RELATIVE GVA PER HEA

2 1

% pa

0

90

-1

4

-2 2005

3 2006 2

89 2007

2008 NW

1

2009

2010

2011 88

UK

pubs 0 in the region, as elsewhere in the UK, are becoming increasingly sensitive,2008 and less2009 willing to2010 spend on 2006price 2007 2011 -1 EMP food , illustrating pressures onGVA discretionary spend.

87

FINANCIAL AND BUSINESS SERVICES: Growth is expected to slow sharply in 2008 and 86 2009, but will be 2004 2005 2006 stronger than the UK average

We estimate that financial & business services in the Northwest have achieved output growth of over 6% % pa pa since 2005, reaching 81⁄2% in 2007. Panel members 5 GROWTH IN THE NORTH WEST CHART 5: PROSPECTS FOR OUTPUT say that the sector has not yet shared in the sharp CHART 6: GVA IN MA 4 impact of the financial crisis being experienced in and % pa 3 pa around London. Also there is evidence % that type of work 3 2 5 undertaken in the sector in the Northwest should both help 2 1 4 to protect it somewhat during the downturn and restrict 1 0 the relative strength of the recovery expected in the sector 3 0 2005 2006 2007 2008 2009 2010 2011 in 2010 and 2011.

2 CHART 8: GVA IN DIST. HOTELS AND CATERING CHART 8: GVA in DIST., HOTELS & CATERING

-1

NW UK 1 Source: Panel Forecasts, Spring 2008.

0 2006 2007 2008 2009 2010 TRANSPORT AND COMMUNICATIONS: Growth will Services CHART 10: GVA in FINANCIAL &Manufacturing BUS. SERVICES

-2 includes both The financial service sector in the Northwest 2005 2006 2007 head office and back-office operations, and individual 2011 firms are major employers in some local economies within the region. For example, MBNA bank (owned by the follow the general economic cycle, slowing sharply in Bank of America) is the largest private sector employer in % pa 2008 and 2009 10 Chester, employing more than 4,000 people.

The prospects in the transport and communications 8 Elsewhere, Barclays is looking to consolidate and expand sector are expected to reflect developments in the wider 6 its corporate banking operations in Liverpool by taking regional, and to some extent the national, economy. The 4 CHART 8: GVA in CHART 7: GVA IN CONSTRUCTION 8,000 sq. ft. of office space at the new Chapel Street office sector has been one of the strongest performing parts of 2 % pa development. pa the% Northwest economy in recent years, with growth of 5 0 4 1 42005 ⁄2-51⁄2%2006 estimated in 2006 and 2007.

Growth is forecast 2007 2008 2009 2010 2011 4 How nationally organised concerns respond to present 3 1 to slow and to just over 2% in 2009 2 to 2 ⁄2% in 2008NW conditions could be important. On the one hand,3 cost UK 1 alongside the slowdown in the Northwest economy. cutting programmes could lead to a search for efficiency 2

0 -1 Liverpool Lennon 2007 Airport is2008 now the2009 UK’s third 2005John2006 2010

savings in their establishments across the country, 1 2011 including the Northwest. On the other hand, just 0as largest regional airport (in terms of passenger numbers).

2005 2006 significant numbers of jobs in this sector were outsourced NW UK The dominance of low cost airlines at the airport may from London after the severe downturn in international % Workforce % limit growth in 2008 and 2009 as consumers rein in 10 2.0 financial activity in 2001, many to the Northwest, another discretionary spending.

8 1.5 round of outsourcing could also benefit the region, and 6 1.0 4 Manchester in particular, where the City Council has been CHART 10: GVA in FINA 2 CHART 9: GVA IN TRANSPORT AND COMMS 0.5 CHART 9: GVA in TRANSPORT & COMMS actively pursuing a number of institutions, we understand 0 0.0 -2 % pa with some success. % pa CHART 12: RECENT DEVELOPMENTS IN THE LABOUR MARKET

8

-4

2004

6

2005

2006

2007

NW Unemp NW Empl

2008

2009

2010

2011

UK Unemp UK Empl

10 8 6

4

4

2

2

0 CHART 14: RECENT DEVELOPMENTS IN THE HOUSING MARKET 2005 2006 2007

2008

2009

2010

% pa NW UK 50 40 30 20 Source: Panel Forecasts, Spring 2008.

10 0 -10 -20 -30 -40 CHART 11: GVA in Public and Other Services -50 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1

% pa UK house3prices

-0.5

NW house prices

2011

0 2005

2006

2

CHART 12: REC

Page 13 % Workforce 10 8

3

4

2

2

1 0 2005

2006

2007

2008 NW

2009

0 2005 2010 2011

2006

2007

2008 NW

UK

CHART 10:10:GVA INFINANCIAL FINANCIAL BUS SERVICES CHART GVA in & BUS.& SERVICES

2009

2010

2011

UK

CHART 11: GVA IN PUBLIC AND OTHER SERVICES CHART 11: GVA in Public and Other Services

% pa 10

% pa 3

8 6

2

4

1

2 0 2005

2006

2007

2008 NW

2009

2010

2011

UK

0 2005

2006

2007

2008 NW

Source: Panel Forecasts, Spring 2008.

2009

2010

2011

UK

Source: Panel Forecasts, Spring 2008.

CHART 12: RECENT DEVELOPMENTS IN THE LABOUR MARKET

CHART 13: NORTHWEST SECTORAL EMPLOYMENT GROWTH

GOVERNMENT AND OTHER SERVICES: Growth is % Workforce % pa expected to recover in 2008 and subsequent prospects 10 8 8 those in the UK as a whole are similar to

6 6 4 4 Under the Comprehensive Spending Review (CSR) 2007 2 2 and Budget-202008, the growth in government spending 0 is 2006 -4 -2 set to slow from the unusually strong growth seen in 2004 2005 2006 2007 2008 2009 the2010

POINTS TO WATCH % 2.0

• We1.5will monitor the sentiment among Northwest 1.0 manufacturers for evidence of their performance 0.5 relative to other parts of the UK. 0.0

• We will review the extent to which2010 financial and 2007 2008 2009 2011 2011 -0.5 business services, and financial services in particular, are being affected by changing circumstances.

-4 NW Unemp government UK Unemp spending first half of the decade. Nationally, NW Empl UK Empl -6 3 increased by only 1 ⁄4% in 2007, and some slight increase -8 • We will look for signs that consumers in the region in growth is expected in 2008. The anticipated increases Manufacturing begin to reinConstruction in their spending more Distribution than presently in spending will be focused on health, and to a lesser Transport & communication Financial & business services Government & other services anticipated, particularly if house prices in the region extent on education. In contrast, there will be little growth continue to fall more than elsewhere in the UK. in spending on general government functions, either by % pa • We will look for evidence that work on construction central or local government.

50 40 projects in the region are being scaled back or projects 30 20 Although we now estimate that output in this sector has being delayed.

10 0 -10 grown more slowly in the region than in the UK as a whole • We shall watch the position on public spending with -20 -30 since 2005, we expect its future growth to be broadly in -40 considerable interest.

-50 line with that nationally. On current plans, output growth 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 will strengthen through to 2011, when it could reach 2.3%.

CHART 14: RECENT DEVELOPMENTS IN THE HOUSING MARKET

UK house prices

NW house prices

However, the government’s NW financial position within ENG transactions Transactions its fiscal rules is already extremely tight on Treasury assumptions about future growth that are a good deal more optimistic than those in this forecast. It is not clear how far future spend might have to be trimmed if the Treasury’s projections begin to be shown to be wrong, or where such cuts might fall.

Page 14

Northwest Sector Output 2004 – 2011 TABLE 5: NORTHWEST SECTOR OUTPUT

16,883 5.2 16,953 0.4 17,615 3.9 18,118 2.9 18,394 1.5 18,633 1.3 19,047 2.2 19,644 3.1

Total

2011

6,332 5.4 6,533 3.2 6,596 1.0 6,737 2.1 6,840 1.5 6,812 -0.4 6,910 1.4 7,082 2.5

Government & other services

2010

1,368 -4.1 1,352 -1.2 1,319 -2.4 1,320 0.1 1,310 -0.8 1,309 -0.1 1,314 0.4 1,324 0.8

Financial & business servies

2009

19,181 2.3 18,987 -1.0 19,341 1.9 19,539 1.0 19,583 0.2 19,635 0.3 19,930 1.5 20,401 2.4

Transport & communications

2008

Distribution, hotels & catering

2007

Construction

2006

113 -4.7 113 -0.2 116 2.6 127 9.8 125 -1.4 125 -0.2 126 0.5 128 1.7

Electricity, Gas and Water

2005

736 2.2 745 1.2 762 2.3 763 0.2 774 1.5 783 1.0 790 0.9 797 1.0

Manufacturing

2004

Mining & Quarying

Agriculture

ÂŁ2003 and % growth pa

8,087 3.1 8,229 1.8 8,674 5.4 9,075 4.6 9,303 2.5 9,497 2.1 9,767 2.8

19,785 8.1 20,988 6.1 22,323 6.4 24,204 8.4 24,953 3.1 25,528 2.3 26,316 3.1 27,350 3.9

23,693 1.2 23,915 0.9 24,240 1.4 24,414 0.7 24,819 1.7 25,287 1.9 25,803 2.0 26,399 2.3

100,897 3.3 102,319 1.4 105,213 2.8 107,972 2.6 109,829 1.7 111,505 1.5 113,985 2.2 117,297 2.9

Source(s): Panel Forecasts, Spring 2008.

Page 15

Northwest Expenditure KEY POINTS •

We expect growth in household spending in 2008 to average just 1.3%, much lower than the 3% estimated for 2007. Although the Northwest economy is expected to outperform the UK as a whole in 2008 and 2009, household spending is likely to be held back by relatively slow employment growth and the weakness in the housing market in particular

•

Investment in the Northwest is expected to fall back slightly in 2008 alongside the general economic slowdown. Investment by both manufacturing and financial & business services should recover in 2009, through the strength of investment by financial & business services will be much weaker than seen in the last few years.

HOUSEHOLD SPENDING: Growth is expected to weaken sharply in 2008 and to remain modest in 2009 Nationally, household spending grew by 3% in 2007. The outcome would have been stronger but for a sharp drop in growth in the fourth quarter of 2007. What evidence there is so far suggests that household spending strengthened again in the first part of 2008 but weakened again around March. We expect quarter-on-quarter growth to slow sharply in the second quarter of 2008 before picking up slightly, but remaining around 1⁄4% for the rest of the year.

The result would be growth in UK household spending of 11⁄2% for 2008 as a whole.

We estimate households in the Northwest currently spend a higher proportion of their income than the average for the UK as a whole. Data show that the Northwest housing market was weaker than elsewhere in the UK in the first quarter of 2008. If this continues and employment growth in the Northwest in 2008 is weaker than in the UK as a whole, as we expect, then the outlook is that growth in household spending in the Northwest in 2008 could be as weak as 1.3%.

FIXED INVESTMENT: Investment is likely fall back in 2008 and remain weak in 2009 No data on regional investment has been published for the period since 2000 and so our view has to be inferred from other complementary sources. Our view is that investment in the Northwest has been relatively strong in recent years, and that growth increased to 4.7% in 2007, with strong growth particularly by financial & business services to support the strong growth in activity in the sector, and the public sector. In sharp contrast, manufacturing investment is estimated to have seen modest growth of around 11⁄4%.

The British Chamber of Commerce Quarterly Economic Survey for 2008Q1 indicates a weakening in the investment plans of both manufacturers and service sector firms. Indeed, there was a balance of manufactures reported revising down their investment plans while the balance of service sector firms that had revised up their investment plans was much reduced from three months earlier.

The outlook is that investment growth will weaken sharply in 2008, before recovering slightly in 2009. We expect investment in buildings to be badly affected during the economic slowdown due to developers facing liquidity problems in particular which will result in them having to slow work on existing projects and delay starting new work. The downturn in investment may be felt first in housing developments, but may be more prolonged in commercial property developments. Elsewhere, manufacturing investment is forecast to fall by 31⁄2% in 2008 as output slows while investment by financial & business services is maintained at the levels seen in 2007.

Investment by both sectors should rise in 2009, though that expected in financial & business services will be much weaker than seen in the last few years.

With general economic growth expected to remain weak through 2009, and employment to fall, household spending could weaken slightly further in 2009 before strengthening in 2010. However, it is likely to be 2011 before growth strengthens significantly, to over 2% pa.

Page 16

Components of Northwest Expenditure 2004 – 2011 TABLE 6: NORTHWEST EXPENDITURE £2003 and % growth pa

2004 2005 2006 2007 2008 2009 2010 2011

Household Expenditure

Government Consumption

Investment

Exports

Imports

79,409 2.8 80,367 1.2 81,821 1.8 84,288 3.0 85,288 3.0 85,390 1.3 86,409 1.2 90,725 2.9

23,725 1.8 24,074 1.5 24,503 1.9 24,979 1.8 25,525 2.2 26,065 2.1 26,671 2.3 27,244 2.2

18,618 6.4 18,930 1.7 19,637 3.7 20,565 4.7 20,269 -1.4 20,659 1.9 21,428 3.7 22,113 3.2

78,927 2.9 79,192 0.3 80,064 1.1 175,679 119.4 178,260 1.5 181,387 1.8 186,192 2.6 193,183 3.8

90,084 1.9 89,771 -0.3 91,925 2.4 129,039 40.4 130,419 1.1 132,547 1.6 135,854 2.5 140,152 3.2

Source(s): Panel Forecasts, Spring 2008.

TABLE 7: NORTHWEST HOUSEHOLD INCOME AND SPENDING Units as indicated and % growth pa

2004 2005 2006 2007 2008 2009 2010 2011

Household Disposable Income (£m)

Household Spending (£m)

Saving (£m)

Saving Ratio (% of disp. income)

Household Disposable Income (£2003m)

Household Spending (£2003m)

79,692 3.6 84,192 5.6 87,178 3.6 89,782 3.0 83,993 2.0 85,683 2.0 87,785 2.5 107,369 5.0

80,758 4.5 83,780 3.7 87,316 4.2 91,900 5.2 95,466 3.9 98,645 3.3 102,723 4.1 107,772 4.9

-1,066 222.0 381 -135.8 -138 -136.2 -2,118 1,435.6 -1,562 -26.3 -829 -46.9 -480 -42.2 -402 -16.1

-1.3 210.8 0.5 -133.9 -0.2 -134.9 -2.4 1391.1 -1.7 -29.5 -0.8 -49.0 -0.5 -44.7 -0.4 -20.1

78,361 1.9 80,733 3.0 81,692 1.2 82,346 0.8 83,993 2.0 85,683 2.0 87,785 2.5 90,386 3.0

79,409 2.8 80,367 1.2 81,821 1.8 84,288 3.0 85,390 1.3 86,409 1.2 88,197 2.1 90,725 2.9

Source(s): Panel Forecasts, Spring 2008.

Page 17

0

2006

2007 2008 Manufacturing

2009 Services

2010

2011

Northwest Labour Markets

CHART 8: GVA in DIST., HOTELS & CATERING

% pa 5

KEY POINTS

4 3

CHART 7: GVA IN CONSTRUCTION

Throughout the forecast, the strongest source of % pa 4 employment growth is expected to be financial and 3 business services and government and other personal 2 1 although in both cases at slower rates than in the services, 0 first half of the decade.

-1

Employment in the Northwest increased by 1.1% in 2 2007, led by construction and financial and business 1 2011 0 services, but employment fell in manufacturing and 2005 2006 2007 2008 2009 2010 2011 distribution and hotels.

2005 2006 2007 2008 2009 2010 2011 UNEMPLOYMENT: Increasing to 2011 NW UK • Employment growth is expected to slow in 2008 and NW UK to fall slightly in 2009, before strengthening from 2010 After the upturn in unemployment in both the Northwest onwards as the recovery phase of the economic cycle and UK in 2006, the rate of unemployment fell a little in becomes established. It will be driven primarily by CHART 10: GVA in FINANCIAL & BUS. SERVICES 2007 in both areas. financial and business services and government and % pa CHART 9: GVA in TRANSPORT & COMMS other personal services.

10 In April 2008 claimant count unemployment edged up % pa • Employment growth in the Northwest is set to lag 8 slightly to 3.1% of workforce jobs compared with 2.5% 8 behind UK growth throughout the period up to 2011. 6 for 6the UK overall. In contrast, the wider International Labour Organisation definition of unemployment in the 4 4 EMPLOYMENT: Growth in the Northwest is expected to three months to March 2008 averaged 6.0% of those 2 be slow in 2008, with a loss of overall jobs likely in 2009 2 economically active; a point around which it has fluctuated 0 2010 2011 0 February This is higher the 5.2% 2005 since 2006 20072007.2008 2009 than 2010 2011for the In October 2007, we expected employment growth for the 2005 2006 2007 2008 2009 2010 2011 UK as a whole. With employment growth expected to slow NW UK year to be 0.4%, lagging well behind the UK rate of 0.9%.

NWin 2009, UKunemployment is in 2008 and decline slightly The latest figures now suggest that, after a year of decline expected to see further modest increases to 2011. in 2006, employment in the Northwest grew by just over 1%, outstripping the rate for the UK as a whole.

CHART 12: RECENT DEVELOPMENTS IN THE es

LABOUR MARKET CHART 11: GVA in Public and Other Services The outlook is for employment growth to slow in 2008 % Workforce % % pa 10 2.0 and remain relatively weak throughout the forecast period 3 8 1.5 to 2011, with the strong prospect of a fall in the overall 6 1.0 4 2 number of jobs in 2009.

•

2010

CHART 12: RECENT DEVELOPMENTS IN THE LABOUR MARKET

In 2007 employment growth in financial and business services accelerated while the job losses seen in construction in 2006 were reversed. Manufacturing 2009 2010 2011 employment continued to fall in 2007 but at a slower rate than in 2006.

2 0 -2 -4

0.5

1 2004

0.0 2005

2006

0 NW Unemp 2005NW Empl 2006

2007

2008

2009

UK Unemp 2007 2008 UK Empl

Source: Panel Forecasts, Spring 2008. NW

CHART 13: NORTHWEST SECTORAL In 2008 employment growth is expected to slow down

EMPLOYMENT GROWTH in response to slower growth in financial and business % pa % pa services, limited growth in distribution and hotels and 50 8 transport and communications and a renewed fall in40 30 6 20 construction jobs. Job losses in manufacturing are 10 4 0 1 expected to continue at a slightly slower rate (-1 ⁄2%) -10than 2 -20 0 -30 in 2007, and much slower than seen earlier in the decade.

-40 2006 2007 2008 2009 -2 In 2009, employment in construction is expected to-50 fall -4 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 10 2011 further and the rate of job losses in manufacturing is likely -6 UK -8 house prices NW house prices to increase. Employment in consumer services is also expected to fall in 2009 after experiencing rather weak Manufacturing Construction ENG transactions NW Transactions Transport & communication Financial & business services growth in 2008.

Distribution

2010

2009

2011

-0.5

2010

2011

UK

CHART 14: RECENT DEVELOPMENTS IN THE HOUSING MARKET CHART 13: NORTHWEST SECTORAL EMPLOYMENT GROWTH

Government & other services

2010

2011

2007Q1

Distribution Government & other services

Source: Panel Forecasts, Spring 2008.

Page 18

Occupations: Significant differences in occupational structures remain The occupational structure of the Northwest is not dramatically different from the UK as a whole: the Northwest has a slightly lower proportion of high-level occupations and a slightly higher share of low-level occupations. However, these differences are more pronounced compared with the Wider South East. This reflects sectoral differences such as the higher share of manufacturing employment in the Northwest, but also the nature of work done in each sector (for example, the concentration of international financial and related services in London, compared with a greater focus on servicing clients within the Northwest in this region’s financial and business services).

POINTS TO WATCH •

Employment growth is usually a lagging indicator of economic performance, and so it may be some months before the consequences of an economic slowdown in 2008 become evident in the labour market. We shall monitor signs of a slowdown in job creation, especially in financial and business services.

• We shall monitor the make-up of employment growth, since a weakening in activity is often associated with a shift towards temporary work and self-employment.

Page 19

Northwest Labour Markets 2004 – 2011 TABLE 8: NORTHWEST LABOUR MARKET Unit as indicated and % growth pa

2004 2005 2006 2007 2008 2009 2010 2011

Employees in Employment (000s)

Employment (000s)

Unemployment (000s)

Unemployment Rate (NW)

Unemployment Rate (UK)

2,986 1.3 3,000 0.5 2,980 -0.7 3,006 0.9 3,016 0.3 3,014 -0.1 3,028 0.5 3,063 1.1

3,381 1.8 3,382 0.0 3,371 -0.3 3,409 1.1 3,416 0.2 3,410 -0.2 3,421 0.3 3,456 1.0

99 -11.2 101 2.1 116 14.0 110 -4.8 112 2.2 118 4.7 128 8.4 130 1.8

2.8 -12.4 2.9 2.1 3.3 14.1 3.1 -5.6 3.2 1.9 3.3 4.7 3.6 7.8 3.6 0.7

2.7 -9.2 2.7 -0.2 2.9 8.5 2.7 -9.0 2.8 5.1 3.0 5.9 3.1 4.6 3.1 0.7

Source(s): Panel Forecasts, Spring 2008.

Page 20

Northwest Sector Employment 2004 – 2011 TABLE 9: NORTHWEST SECTOR EMPLOYMENT

Total

2011

Government & other services

2010

Financial & business servies

2009

Transport & communications

2008

Distribution, hotels & catering

2007

Construction

2006

Electricity, Gas and Water

2005

23 -5.1 21 -9.7 20 -1.4 20 -0.1 21 2.5 20 -2.5 20 -2.6 19 -2.6

Manufacturing

2004

Mining & Quarying

Agriculture

000s and % growth pa

2 -4.8 2 9.7 3 6.9 2 -8.2 2 -5.1 2 -0.9 2 -0.8 2 -0.4

450 -3.4 422 -6.2 403 -4.6 396 -1.7 390 -1.4 379 -2.8 372 -1.9 369 -0.8

8 -23.5 8 -0.2 8 5.9 8 5.2 8 -0.7 8 -2.9 8 -3.6 8 -2.7

207 3.0 229 10.2 214 -6.3 230 7.1 229 -0.4 225 -1.4 226 0.1 228 1.2

805 2.2 798 -0.9 789 -1.1 781 -1.1 785 0.5 783 -0.2 785 0.2 796 1.4

217 1.8 213 -1.8 218 2.7 215 -1.6 215 0.2 215 0.1 216 0.4 219 1.1

593 2.8 602 1.5 623 3.6 658 5.6 663 0.8 668 0.7 678 1.6 692 2.0

1,077 3.4 1,088 1.1 1,093 0.4 1,100 0.6 1,103 0.3 1,108 0.5 1,114 0.6 1,123 0.8

3,381 1.8 3,382 0.0 3,371 -0.3 3,409 1.1 3,416 -0.2 3,410 0.3 3,421 0.3 3,456 1.0

Source(s): Panel Forecasts, Spring 2008.

Page 21

Northwest Prices and Earnings KEY POINTS •

In April 2008 CPI inflation stood at 3%, a sharp rise on the rate in February and March. After considerable decline over the summer months of 2007, September marked the beginning of gradual monthly increases.

Despite the economic slowdown anticipated in the second half of 2008, concerns remain that rising energy and food prices could further increase inflationary expectations.

•

Nationally, average earnings inflation (including bonuses) edged upwards from 31⁄2% in June 2007 to 4% in November, before falling back to 33⁄4% by February 2008. At 4.2%, growth in average earnings in the Northwest exceeded that for the UK in 2007. Over the forecast period to 2011 average earnings growth in the region is expected to remain around 4.3% pa, about the same as the UK average.

PRICES AND INFLATION: Inflation has yet to spread much outside of energy and commodity prices In our October 2007 forecast we did not expect inflation to accelerate, even though the latest oil price increases had not been fully felt in the economy, as we expected downward pressure from the anticipated economic slowdown.

In the event, inflationary pressures have increased a lot since then, mainly in response to further increases in oil and gas prices, and other commodity prices, and as discussed in more detail in our Chapter on the UK Economy.

The escalating energy and food prices have featured in the increases in the RPI and CPI inflation, and there is concern that they will have wider impact on domestic inflation through the price of other goods and services.

The acceleration in energy and commodity prices has been reflected in the increases in the price of inputs faced

by UK manufacturers. Whereas in August 2007 prices were just 0.6% higher than a year earlier, by March 2008 input price inflation was running at 20.6%. This has been reflected in manufacturers’ output price inflation, which has gradually increased since August 2007 to stand at the relatively high rate of 6.2% in March 2008.

The British Chamber of Commerce Survey continues to report a large balance of companies, especially among manufacturers, facing pressure to raise prices in response to the price of raw materials. The survey indicates that the pressure on manufacturers has been greater in the Northwest than in the UK as a whole, but that this gap has narrowed.

EARNINGS: Growth in earnings will average 4.25% Nationally, the annual growth in underlying earnings (excluding bonuses) has been relatively stable since mid2007, and stood at 3.8% in the three months to February.

Including bonuses, the rate peaked at 4.0% in November before falling back to 3.7% in February. In the last six months the growth in average earnings in services has been slightly higher than that in manufacturing, while earnings growth in the private sector has been marginally higher than that in the public sector.

Data from the Annual Survey of Hours and Earnings (ASHE) for 2007 indicates that earnings growth in the Northwest was stronger than in the UK as a whole, by approximately 1 pp. We think it likely that growth in average earnings will remain largely unchanged in the Northwest in 2008, whilst the UK is expected to close the gap with the region.

We judge that growth in average earnings will average 4.1% in 2008, slightly slower than in 2007, but growth will accelerate marginally in 2009 to 4.3%, despite a weaker labour market. The government has announced pay reforms which indicate its continued commitment to keeping public-sector pay increases in check, but expectations of inflation have increased there, and this has been reflected in some pay disputes. Some households with mortgages will also be seeing an increase in interest payments as their initial deals offering relatively low rates expire. But if labour demand weakens a little, as we expect, this should have a depressing influence on average earnings.

Page 22

Northwest Prices and Earnings 2004 –2011 TABLE 10: NORTHWEST PRICES AND COSTS Units as indicated and % growth pa

2004 2005 2006 2007 2008 2009 2010 2011

Average Earnings - NW (£)

Average Earnings UK (£)

Retail Price Index (RPI) (1987 = 100)

Retail Price Index excl Mortgage Interest Payments (RPIX) (1987 = 100)

Price of Consumer Expenditure NW (2003=100)

18,682 2.8 19,502 4.4 20,364 4.4 21,214 4.2 22,090 4.1 23,048 4.3 24,047 4.3 25,077 4.3

20,725 3.5 21,462 3.6 22,320 4.0 23,179 3.8 24,157 4.2 25,233 4.5 26,343 4.4 27,485 4.3

186.7 3.0 192.0 2.8 198.1 3.2 206.6 4.3 212.1 2.7 217.1 2.3 221.8 2.2 226.5 2.1

184.0 2.1 186.8 1.5 191.9 2.8 196.0 2.1 224.5 14.5 229.7 2.3 234.8 2.2 239.7 2.1

101.5 1.5 104.0 2.4 106.5 2.3 108.5 2.0 111.2 2.4 113.4 2.0 115.6 1.9 117.8 1.9

Source(s): Panel Forecasts, Spring 2008.

Page 23

UCTION

Northwest Construction and Housing CHART 8: GVA in DIST., HOTELS & CATERING

% pa 5 4

KEY POINTS

HOUSE PRICES: Inflation weakened through 2007 3

• GVA growth in construction is estimated to have picked up in 2007 to 2.1%, but in 2008 growth is expected to 08 2009 weaken to2010 1½%. 2011 GVA is then expected to fall in 2009 UKbefore recovering in 2010 and 2011.

MMS

• Since the first quarter of 2007 the rate of increase in house prices in the region has declined, while in the final quarter of the year house price inflation in the UK declined for the first time in two years. Along with a fall in the numbers of housing transactions, this confirms that the housing market is weakening.

House price inflation slowed through 2007 despite 2 reductions 1 in interest rates during the year. At the end of 2007,0 prices were on average 5.0% higher than a 2005in the2006 2007compared 2008 with2009 year earlier Northwest 9.9% in2010 the UK. Along with slower price inflation since the beginning NW UK of 2007, latest figures (Q2 2007) for the number of transactions show a decline for both the Northwest and UK. This is consistent with the tightening of monetary CHART 10: GVA in FINANCIAL & BUS. SERVICES policy during 2006/07 and tougher lending standards for % pa mortgages after the recent difficulties in financial markets 10 and points to a slowdown in the market.

CONSTRUCTION ORDERS: Growth in 2007 was sustained by private commercial orders

HOUSING INVESTMENT: The outlook is for weaker 6 activity 4 in the short term

Construction orders increased through the first half of 2007, but since fallen back. In 2007 private sector 2009 2010have 2011 new housing orders declined to below 2005 levels.

UK However, the level of infrastructure and other public orders increased. Private industrial orders remained relatively unchanged from 2006; growth in private commercial orders was much more marked in the first half of the year, nd Other Services although they have since fallen back.

The value of construction output in 2007 was 12.8% higher than in 2006, due primarily to new public housing and other private sector repair and maintenance. Private commercial and industrial output growth more than offset a decline in infrastructure output.

GVA growth construction 2008 2009 in 2010 2011 was weak in 2006 at 1.0%

NW

but is estimated to have strengthened to 2.1% in 2007, UK although this was weaker than in the UK as a whole.

Weaker growth is expected in 2008; 1½% for the Northwest and 1% for the UK. GVA is then expected to fall in 2009 in response to the impact of the credit crisis and the weakening housing market, before recovering in 2010 and 2011.

More detail on construction is to be found in our Chapters on the UK Economy and Northwest Sector Output.

009

ess services

2010

2011

Distribution Government & other services

2011

8

2

Short-term prospects for housing investment in the region 0 are considerably less favourable than in 2009 recent years.

2005 2006 2007 2008 2010 2011 The number of new dwellings started declined by 19.0% NW UK compared to 6% nationally, representing the first decline in four years. Housing starts across all categories (private enterprise, registered social landlords and local authorities) declined by a larger amount in the region than nationally in 2006/07. Potential downside risks to the housing market % Workforce remain including the current liquidity issues in capital 10 markets and8resultant reductions in mortgage packages 6 available on 4the high street and high levels of consumer debt.

2 CHART 12: RECENT DEVELOPMENTS IN THE LABOUR MARKET

0 -2 members report sharp falls in housing starts -4 2004 2005 2006 2007 2008 2009

Panel 2010 this year with some smaller already in NWhouse Unemp builders UK Unemp NW Empl Empl difficulties and large nationally organisedUKconcerns scaling back new build.

CHART 14: RECENT DEVELOPMENTS IN

THE HOUSING MARKET CHART 14: RECENT DEVELOPMENTS IN THE HOUSING MARKET

% pa 50 40 30 20 10 0 -10 -20 -30 -40 -50 2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

UK house prices

NW house prices

ENG transactions

NW Transactions

2006Q1

2007Q1

Source: Communities and Local Government.

Page 24

2011