/NWDA_ShortTermReport_Spring10

Business Forecasts Northwest A Short Term Forecast for 2010–13 Spring 2010

A report by the Northwest Regional Economic Forecasting Panel

This report is published by the Northwest Regional 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 Consulting 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 Consulting, 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 The Northwest economy has emerged from recession. Low interest rates, a fall in the exchange rate and lower than expected unemployment have allowed recovery ahead of schedule. Survey evidence suggests that the Northwest is as well placed as any UK region to capitalise on improving trading conditions, although events in the Euro-zone are worrisome in this regard. The Panel have subjected their forecast for subdued growth to rigorous examination. It is the Panel’s view that the need to further reduce debt in the private sector balance sheet and the now pressing need to address public sector debt will drag on economic growth in the Northwest for some time. The recent turbulence sparked by events in Greece is a timely reminder of the risks to recovery posed by high debt levels. The Northwest region will have to traverse a number of these risk episodes to secure its economic recovery.

While the Panel is independent of the NWDA, we enjoy the support of the Region’s Research Unit, based in the 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 SQW Consulting supported by Cambridge Econometrics for draft material we have taken account of in preparing this forecast.

This economic forecast is designed to be interesting and practical.

We are keen to engage in debate on the economy with everyone in the Northwest. If you have comments or would like to get involved with our work then please contact us on: Nicola.Christie@nwda.co.uk

Andrew McLaughlin Panel Chair

Contents Executive Briefing

i

Sectoral Growth Charts – Northwest and UK, Spring 2010

iii

The World Economy

1

The UK Economy

3

Northwest Economy Outlook

6

Northwest and UK GVA 2006–2013

9

Northwest Sector Output

10

Northwest Sector Output 2006–2013

14

Northwest Expenditure

15

Components of Northwest Expenditure 2006–2013

16

Northwest Labour Markets

17

Northwest Labour Markets 2006–2013

19

Northwest Sector Employment 2006–2013

20

Northwest Prices and Earnings

21

Northwest Prices and Earnings 2006–2013

23

Northwest Construction and Housing

24

Executive Briefing •

The most expensively purchased economic recovery ever is gaining traction in the Northwest.

The Panel expects official data to confirm that the region’s economy emerged tentatively from recession in early 2010. While growth should then strengthen, it will remain weak through to 2013.

•

The Panel’s view is still that the U shaped recovery, which assumes that the need to reduce debt on private/public sector balance sheets saps the strength of recovery for several years, is the most probable outcome for the Northwest, UK and global economies. On balance, the Panel remains more cautions about the prospects for recovery than the consensus. The counter-point from the ‘V camp’ is that this is manageable if low interests rates keep servicing costs down and that several years of strong growth can radically alter balance sheet positions for the better.

•

The Panel does not expect the economic recovery to create a substantial number of new jobs in the region over the forecast period. During the recession, firms and workers have responded to limit job losses, implemented flexible working arrangements, and established new pay deals.

There has also been recognition on the part of employers of the costs that would be incurred in re-recruiting workers to exploit the recovery when it came. This has led to the retention of staff but also a large increase in people working on an under-employed basis. Given this, as the recovery becomes established, firms will for some time be able to meet increased demand by reinstating full-time working where it had been cut, rather than by recruiting more staff. At the same time, in the public sector, whilst this has been a major source of employment growth over the past decade or more, employment prospects for the future are sanguine.

•

The Panel acknowledges within its view that those countries which entered the global recession with strong balance sheets (e.g. BRICs, Australia, Sweden etc) can achieve a V shaped recovery.

The salient point is that Northwest manufacturing exporters are overwhelmingly geared to countries in the U camp and have much to do to build equivalent trade flows with countries enjoying V shaped recovery.

•

The rising macro risk is the possibility of contagion from the sovereign debt crisis engulfing Greece and rest of the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain). A key aspect of policymakers’ attempts to avert depression was an expansion of the public sector balance sheet (in some cases by transferring problematic assets from the private sector balance sheet).

That compounded pre-existing strains in some

GVA GROWTH IN THE NORTHWEST AND UK % pa 3 2 1 0 -1 -2 -3 -4 -5 -6

2008

2009

2010

2011 NW

2012

2013

UK

Source: Regional Accounts and Panel Forecast, Spring 2010

•

Forward-looking business and consumer surveys are supportive of continued growth. This is more true in manufacturing as companies capitalise on a weaker currency and buoyancy in some export markets. The importance of export demand to the region’s economy is underlined by the fact that both manufacturing and service companies are seeing a tail off in domestic orders.

•

Business confidence is weak as companies eye political and economic uncertainties. It is therefore surprising to find Northwest consumers the most confident in England. This has helped consumerfacing businesses in retail, hotels and catering maintain respectable volumes but it seems a fragile position. The Panel’s view is that impending tax increases, spending cuts and, in time, base rate increases have yet to be fully factored into household budgets.

•

Consistent with its long-held forecast narrative, the Panel expects modest growth for the region this year, with the balance of risk on the downside.

In particular, many jobs and many new orders in construction and services are highly vulnerable to lower public spending from 2011 onwards.

•

The wider macro-economic backdrop remains fascinating. There is an animated debate between those who foresee a vigorous rebound in growth (the so-called V) and those who expect a sluggish recovery (U) or worse still (W or L). This is a healthy development at a time when something akin to a Volcanic Ash Cloud hangs over the economic signals.

i

countries. While we do not expect a sovereign debt default will be countenanced, the risk that markets demand higher interest rates to fund countries is ever present. Were that to occur in the UK, it would place great strain on over-indebted household and public sector budgets.

ii

Sectoral Growth Charts – Northwest and UK, Spring 2010 TOTAL GVA

% pa

8 6

3

4

2 1

2

0 -1 -2

0 -2

-3 -4 -5

GVA IN TRANSPORT & COMMUNICATIONS

% pa

4

-4 -6 2006

2007

2008

2009 NW

2010

2011

2012

2013

2006

2007

2008

UK

2009 NW

GVA IN MANUFACTURING

8

3

6

0

4

-3

2

-6

0

-9

-2

-12

-4

2011

2012

2013

UK

GVA IN FINANCIAL & BUSINESS SERVICES

% pa

% pa

2010

-6

-15 2006

2007

2008

2009 NW

2010

2011

2012

2013

2007

2008

UK

2009 NW

GVA IN CONSTRUCTION

% pa

2006

2010

2011

2012

2013

UK

GVA IN PUBLIC AND OTHER SERVICES

% pa 3

5

2

0

1 -5

0

-10

-1

-15 2006

2007

2008

2009 NW

% pa

2010

2011

2012

2013

-2 2006

2007

2008

UK

2009 NW

GVA IN DISTRIBUTION, HOTEL & CATERING

2010

2011

2012

2013

UK

Weight of Key SECTORS IN OVERALL GVA (% of total. 2008)

6 4

Northwest

UK

2

Manufacturing

17

13

0

Construction

7

6

Distr., Hotels & Catering

16

15

-2 -4 -6 2006

2007

2008

2009 NW

2010 UK

2011

2012

2013

Transport & Comms

8

8

Financial & Business Services

20

26

Public and Other Services

24

23

Source(s): Cambridge Econometrics

iii

The World Economy KEY POINTS •

The global recovery is mixed, with the recoveries in Japan and the euro-zone stalling in 2009H2, an upturn in the US and strong growth in some emerging economies, notably China.

•

Monetary policy remains accommodative but other fiscal and monetary stimulus measures are being wound down. Fiscal tightening is now becoming the priority for policymakers.

•

The deflationary period has passed for the moment, but core inflation remains weak in the face of subdued domestic demand.

THE GLOBAL RECOVERY HAS STUTTERED AND DOMESTIC DEMAND REMAINS WEAK The US recovery strengthened in 2009Q4 as GDP growth accelerated to 1.4% quarter-on-quarter.

The pick-up was driven by: rebounds in business investment, as credit conditions and confidence improved; net exports, boosted by a further weakening of the dollar in 2009Q4; and a slower rate of de-stocking.

However, the sharp increase in employment in March aside, job creation during the recovery has been negligible. Unemployment remains close to 10% and the average duration of unemployment is ten weeks longer than it was a year ago. Growth in consumer spending slowed in 2009Q4. With a sharp fall in February wiping out the recent improvement in consumer confidence, consumers running down their savings to maintain spending, and the housing market remaining weak, it is unclear just how much support US consumers will provide in the short term. The consensus is for US growth to peak at 3½-4% year-on-year in 2010H2, and slow slightly to 3-3½% year-on-year in 2011.

Sharp revisions show that the recovery in Japan stalled in 2009Q3, as GDP fell back, before resuming in 2009Q4, when GDP grew by 0.9% quarter-onquarter. To date, the recovery has been underpinned by exports and stimulus initiatives aimed at domestic demand. Exports have been boosted by strong demand from China and other developing nations for cars and machinery. Retail sales growth accelerated in February after strong growth in January. However, deflationary pressures remain and industrial production fell in the same month. Meanwhile, there are signs of a gradual improvement in the labour market. The rate of unemployment was unchanged in February, after falling from 5.2% in December to 4.9% in January.

The euro-zone recovery ground to a halt in 2009Q4, with zero GDP growth. But for the contribution from net trade, the outturn would have been worse, with government and investment spending both falling and household spending unchanged on its 2009Q3 level.

The consensus is for growth to reach 1¼-½% yearon-year in 2010H2 and remain in that range through 2011. Evidence from the first months of 2010 has been mixed. Industrial confidence has continued to improve and production increased in January, as eurozone manufacturers benefited primarily from more favourable export conditions. But industrial new orders fell in January, while the contraction in construction accelerated sharply in February. Meanwhile, the rate of unemployment has continued to rise, reaching 10% in February and, with consumer confidence falling back slightly, retail sales volumes have continued falling thus far in 2010.

CHART 1: PROSPECTS FOR GROWTH IN THE WORLD ECONOMY % pa 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 -10

2008Q1

2009Q1 US

Japan

2010Q1 Eurozone

2011Q1 UK

Source: Main Economic Indicators, OECD (2010/2) and Consensus Forecasts (April 2010).

MONETARY POLICY REMAINS LOOSE BUT FISCAL POLICY IS BEGINNING TO TIGHTEN Interest rates remain at historic lows in the US (0-¼%) and in the euro-zone (1%). In Japan, they remain at just above 0% and are set to remain there until deflation is no longer a threat. The Federal Reserve expects to keep US rates low for an extended period in order to support the recovery, and there is no urgency for the European Central Bank (ECB) to raise rates given that the recovery has proved patchy so far and that inflation remains below target. But with recoveries now under way, both the Federal Reserve and the European Central Bank have started to scale back some of the measures they implemented during the crisis to boost liquidity. In Japan, however, the central bank has extended its support scheme

1

to commercial lenders (to ¥20tn) in a bid to increase lending and boost activity. Meanwhile, the dollar’s steady decline against the euro and yen has come to an end, reflecting more positive news from the US recently. The dollar appreciated by around 14% against the euro between December and April. Against the yen, the dollar has been more volatile, but it strengthened considerably in March, to its highest level since August 2009.

As the global outlook improves, albeit for a gradual recovery, governments are now looking to scale back fiscal support programmes and slash high levels of public debt. Car support programmes in the US and Germany came to an end in 2009Q3. In the US, tax credits for first-time homebuyers have finished. The persistence of high unemployment in some countries, however, will weigh on attempts to cut spending.

In the longer term governments will need to raise taxes and cut public expenditure. This is an extremely serious challenge for some euro-zone countries.

Many are struggling to reduce their debt and the case of Greece serves as an example of just how challenging it will be for governments to scale back public spending in order to get public finances under control.

POINTS TO WATCH •

A key uncertainty is the strength of the global recovery. Japan and the euro-zone have both seen their recoveries stumble. Exports have played a key role in the recoveries in the major economies, but more support is required from domestic demand. The key risk is that, with unemployment still high in many countries, stimulus packages ending and, the housing market relapsing in the US, consumer spending remains weak and firms see no reason to accelerate investment plans. This would drag out the global recovery and make it harder for those countries with high budget deficits to embark on budget cuts of the required scale.

•

Despite a sharp fall in February, US consumer confidence has otherwise been rising since November 2009. In March, US consumers were more optimistic about the labour market and pay rises. If March’s increase in employment is repeated over the coming months and the housing market picks up speed, consumer confidence and spending could also pick up, underpinning a sustained US recovery.

PRICES HAVE STOPPED FALLING FOR THE MOMENT The period of falling prices came to an end in the US and the euro-zone in 2009Q4. The recovery in prices was driven by rising commodity prices, and the pick-up in activity and reduction in excess capacity. In early-2010 headline consumer-price inflation eased a little in the US and the euro-zone.

In Japan, consumer prices continue to fall, but the pace of decline is slowing. However, moves by the Japanese government to eliminate school tuition fees could give renewed impetus to falling prices in the coming months. Meanwhile, core inflation in the US and the euro-zone has continued to slow on an annual comparison and, on a monthly basis, it has been close to or around zero. This has prompted fears that deflation may return, especially as stimulus measures end and taxes rise. While a continuation of the global recovery can be expected to provide further upward pressure to producer and consumer prices, it is not clear to what extent it could offset falls in core inflation if private sector demand remains weak.

2

The UK Economy KEY POINTS •

Household spending and slower de-stocking, boosted by stimulus measures, helped to lift the UK out of recession in 2009Q4. While domestic demand looks set to remain weak in the short term, as evidenced by initial estimates of slower growth in 2010Q1, we expect the pace of recovery to pick up over the course of 2010.

•

Headline CPI inflation has strengthened and is well above target. While the Bank of England believes this will fall back fairly swiftly over the coming months, core inflation remains firm, due in part to sterling’s weakness, and is higher than in the US and euro-zone. If this persists, monetary policy may need to be tightened sooner than expected.

•

The exact scale and timing of fiscal tightening continues to be debated, but some measures are to be implemented in 2010.

CHART 2: OUTPUT AND EMPLOYMENT GROWTH PROSPECTS FOR THE UK

DOMESTIC DEMAND LOOKS SET TO REMAIN WEAK

% pa 3 2 1 0 -1 -2 -3 -4 -5 -6

2008

2009

2010

2011 GVA

2012

2009Q4, buoyed by an increase in motor vehicles, capital goods, and intermediate goods production, and was unchanged in 2010Q1. However, output in distribution (wholesale distribution, retailing, hotels & catering) fell by ¾% quarter-on-quarter in 2010Q1, after growth in 2009Q4 had been boosted by spending brought forward before stimulus measures expired. Growth in transport and communications was unchanged in 2009Q4 and 2010Q1 but remains positive, supported by a recovery in post and telecommunications services. Growth in financial & business services, which accelerated further in 2010Q1, is being driven primarily by increased activity in professional services, although banking activity is now picking up. After growing in 2009Q2 and 2009Q3, construction output fell back for a second successive quarter in 2010Q1 as many public sector projects have been put on hold while private sector activity has yet to recover.

2013

EMP

Source: Panel Forecasts, Spring 2010.

STIMULUS MEASURES HELPED THE UK EXIT THE RECESSION IN 2009Q4 UK GDP grew by just under ½% quarter-on-quarter in 2009Q4, the first quarter of growth since 2008Q1, as household spending picked up and de-stocking slowed. Household spending was boosted by the car scrappage scheme and the bringing forward of some spending before VAT returned to 17½% in January.

Government spending was the only other component to make a positive contribution to GDP growth. After returning to growth in 2009Q3, investment demand fell by 2¾% in 2009Q4, driven by a fall in business investment; and, despite the recovery in trade flows, net trade remained negative.

However, initial estimates suggest GDP growth slowed to ¼% quarter-on-quarter in 2010Q1. Manufacturing recovered to ¾% quarter-on-quarter growth in

It appears that the car scrappage scheme and the lower VAT rate helped to stimulate spending and curb the drop in household spending in 2009. But since these have come to an end, and to some extent simply brought forward spending, it remains to be seen if the acceleration in household spending and slowdown in de-stocking which drove the recovery in 2009Q4 can be sustained in the short term.

Unemployment has continued to rise after a brief decline towards the end of 2009, while activity in the housing market has slowed, even though house prices continue to strengthen. These factors, along with low wage increases, falling real incomes and a higher rate of saving can be expected to restrain household spending in the short term. The volume of retail sales fell by 1¾% quarter-on-quarter in 2010Q1.

Uncertainty about the nature and strength of the recovery, and forthcoming cuts in government spending, are holding back investment plans. The British Chamber of Commerce (BCC) survey for 2010Q1 showed capital investment plans remain negative, although confidence about short-term profitability remains firmly positive. The growth in lending has continued to slow, partly as a result of weaker demand for new loans and overdrafts, and this raises questions about longer term capacity once the recovery is firmly in place.

3

Investment is expected to continue falling in 2010 and household spending to remain flat. The need to take credible steps to tackle the budget deficit means the outlook for government spending has not changed: spending to slow over 2010 and fall in 2011 and through to 2013. Much therefore depends on the strength of the recovery in export markets. We expect GDP to grow by just 1¼% in 2010 and 2¼% in 2011.

The outlook for manufacturing remains positive but fragile after production of some consumer and intermediate goods fell back in 2010Q1 and export demand fell back in January. In construction, activity in the property market fell back from 2009Q4 levels in early 2010. With new order levels in 2009Q4 unchanged for the second successive quarter, as public-sector orders fell back, a recovery in construction before 2011 remains highly uncertain. The ending of some stimulus measures and restrained household spending mean that activity in distribution (wholesale distribution, retailing, hotels & catering) is expected to remain weak in 2010H1 and only strengthen towards the end of the year. Financial & business services is seeing a return to growth in 2010, driven by a recovery in professional services. Transport & communications should recover with modest but steady growth in 2010, as economic conditions improve.

INFLATIONARY PRESSURES HAVE PICKED UP CONSIDERABLY Producer price (input and output) inflation and CPI inflation increased sharply between October and April as the benefit of the reduction in oil prices, and hence fuel costs, a year earlier dropped out of the annual comparison; VAT returned to 17½% in January and the further depreciation of sterling against the dollar added to the impact of the rise in dollar oil prices in this period. Core input-price inflation rose to over 6% in April as oil prices held up and this was well up on the 1% year-on-year recorded for October. The weakness of demand had curbed the rise in core output-price inflation, but this accelerated in early 2010 to reach almost 4½% year-on-year in April.

CPI inflation hit 3.4% in March, as housing-related costs rose after falling a year earlier. Rising road-fuel and food costs were other key drivers. Despite the weakness of demand and excess capacity, core inflation remains strong and higher than in other major economies. However, with wage inflation remaining low, the outlook is for consumer price inflation to

subside, assuming that sterling does not depreciate sharply further. We do not expect the base rate to be raised from ½% before late-2010.

RISKS TO THE UK FORECAST Although the UK emerged from recession in 2009Q4, it remains to be seen if this can be sustained. Growth slowed in 2010Q1, but remained positive. The risk is that, with stimulus measures aimed at consumers having come to an end, substantial cuts in the public sector likely, construction activity falling, and lending to business still falling, the UK could experience a double dip recession as households and firms hold back spending and the recovery in the UK’s key export market (the euro-zone) fails to gather pace.

Much uncertainty surrounds the scale and nature of the cuts in government spending to come in the UK, which the new Government is still in the process of working through. The challenge for the government will be to keep financial markets satisfied about deficit reduction plans without damaging the recovery. Failure on the former would see sterling depreciate further and raise the cost of financing the debt. Failure on the latter would hit output, the labour market and tax receipts.

To date unemployment has not risen by as much as expected. But it is unclear whether the increases in the first quarter of 2010, after a period of decline at the end of 2009 is a signal of further rises to come.

If the fall in unemployment resumes, and if this is associated with an increase in employment (which reached its lowest level since 2005 in February), this would mark the beginning of a sustained recovery, bolstering consumer confidence and spending and, in turn, business confidence.

POINTS TO WATCH •

It remains to be seen where cuts in public spending will be made and how severe they will be. However, with the main political parties promising to safeguard frontline services, areas like defence, IT programmes and capital spending appear more exposed. This would hit the engineering and construction sectors. Consulting and outsourcing industries could suffer from reduced government demand, or benefit, if more work is outsourced from government.

4

•

A sustained recovery depends on a stronger labour market, an end to the decline in real incomes, and stronger activity in the housing market. We shall monitor these for signs that they are moving in the right direction in a sustained manner.

•

To date, the weakness of global demand means exporters have not benefited from a weaker pound by as much as expected, while higher import prices have pushed up inflation. If this persists, then monetary policy in the UK could be tightened sooner and faster than in other economies, depressing growth.

•

In light of evidence that the Northwest’s trading links to the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain) are not particularly strong, the region might not be as affected by the sovereign debt crisis engulfing these countries compared to elsewhere in the UK. However, there is a risk that markets demand higher interest rates to fund countries, which would place great strain on overindebted household and public sector budgets.

•

A key factor weighing down on the recovery has been the weakness of investment demand.

While the availability of finance has been one factor, another is the uncertainty surrounding the outcome of the General Election. As a new administration begins to implement policies firms may be willing to commit to investment plans, leading to an increased demand for finance.

5

Northwest Economy Outlook KEY POINTS •

Business surveys continue to report improving confidence among business, with the majority of firms expecting turnover to improve in the coming year. However, the level of confidence is still quite weak, particularly in the service sector which reports falls in orders from both domestic and export markets.

•

Consumer confidence has improved and is reported to be higher than in other regions.

However, we believe it to be fragile.

•

Output for 2010 as a whole is expected to rise by 1¼% in 2010 following a fall of over 4% in 2009. The strongest growth is expected in manufacturing. Growth will strengthen in 2011 but the effect of cuts in public spending will mean growth will remain below its long-term underlying trend to 2013.

•

Overall employment in the Northwest is not expected to begin to rise before 2013. Although 2011 could mark the return to employment growth in the private sector, it is not expected to be sufficiently strong to compensate for the loss of public sector employment before 2013.

Non-employment is expected to rise further.

THE NORTHWEST ECONOMY HAS STABILISED… BUT BUSINESS CONFIDENCE REMAINS WEAK In our Autumn 2009 forecast we saw the Northwest economy poised for recovery with findings from the recent company surveys showing increased confidence in the region. We expected growth in 2010 to be weak, but positive, at ¼% and for growth to strengthen in 2011 and 2012, but to remain modest as a result of expected cuts in public spending and increases in taxation.

A small balance of firms also report increased levels of employment, unlike most other regions in the UK. The British Chambers of Commerce (BCC) survey of 2010Q1 indicates confidence among the region’s manufacturers has fallen since the start of the year, although more firms still expect turnover to increase over the year than expect a fall. Confidence among the region’s service companies has improved recently.

Nevertheless, confidence in both sectors in the Northwest is reported to be lower than the national average. The survey supports the view from some regional observers that in the short term the recovery will be founded on exports: both sectors report a drop in domestic orders, while a balance of manufacturers report a pick up in export orders recently.

CONSUMER CONFIDENCE IS QUITE HIGH… BUT FRAGILE Data for 2009H2 show improving levels of consumer confidence and that this was reflected in increased spending and retail sales. The housing market also saw recovery in prices and transactions over this period. By the beginning of 2010, the Nationwide Consumer Confidence Index reported the Northwest having the highest levels in England. Anecdotal evidence suggests that the stronger consumer spending has been maintained in the first part of 2010. However, we consider some of the strength in spending to be the result of initiatives to support the economy, which have now come to an end, and believe confidence to be fragile. The prospects of public sector cuts and tax increases in one form or another will, we believe, mean that the recovery in spending will be gradual.

Since we published our Autumn 2009 forecast, data have confirmed the UK economy came out of recession at the end of 2009. Business surveys indicate that firms in the Northwest have shared in the recovery, though some differences between surveys suggest that the recovery remains fragile.

The Purchasing Managers’ Index (PMI) for March 2010 continues to indicate month-on-month growth in output and orders, with the scale of increase in the Northwest the strongest in the UK outside of London.

6

OUTPUT IS EXPECTED TO RISE BY 1¼% IN 2010 WITH GROWTH REMAINING BELOW TREND TO 2013

% pa 90

Table 1 shows our forecast for output growth in the Northwest and the UK, together with earlier forecasts for selected comparator regions.

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

88 86 84 82 80

table 1: real gva growth (% pa) 2010

2006

2011

2012

2013

CE Forecast as at February 2010 N. West

1.4

1.6

1.7

2.2

W. Mids

0.5

1.7

1.8

2.2

London

1.7

2.2

2.5

2.9

S. East

1.3

2.1

2.2

2.8

UK

1.3

1.8

2.0

2.5

N. West

1.2

1.8

1.5

2.0

UK

1.2

2.2

1.8

2.2

Panel Forecast, Spring 2010

Source(s): Cambridge Econometrics, February 2010, and Panel Forecasts Spring, 2010

Our current estimate is that the Northwest economy shrank by 4-4¼% in 2009. Our broad view for 2010 onwards is similar to that in Autumn 2009, though we have become more optimistic for growth in 2010. We still expect growth in 2010 to be modest, at 1¼%, strengthening slightly to 1½-1¾% in 2011 and 2012 and returning to something closer to its underlying long-term rate in 2013. While prospects for growth in the private sector strengthen over 2011-13, economic growth will be constrained by the sharp cuts in public spending.

We expect growth in the Northwest to be in line with that for the UK in 2010, buoyed by a strong manufacturing sector. Thereafter to 2013, we expect growth to be weaker than in the UK as a whole. % pa

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

3 2 1 0 -1 -2 -3 -4 -5

2008

2009

2010

2011 GVA

EMP

2012

2013

2007

2008

2009

2010

2011

2012

2013

Source: Regional Accounts and Panel Forecasts, Spring 2010.

Manufacturing is expected to be one of the strongest sectors in 2010, benefiting from the ongoing recovery in world trade and the improved competitiveness resulting from the depreciation of sterling. However, with growth in the key EU export markets still fragile, growth will remain modest.

In contrast, the immediate outlook for financial & business services is weak, with growth of just 1% forecast for 2010. While output from financial services has begun to turn up, there is little sign yet of recovery elsewhere in the sector. This is expected to come in the second half of the year and the outlook for 2011 is much stronger.

CHART 5: PROSPECTS FOR OUTPUT GROWTH IN THE NORTH WEST

% pa 6 4 2 0 -2 -4 -6 -8 -10

2008

2009

2010 Manufacturing

2011

2012

2013

Services

Source: Panel Forecasts, Spring 2010.

Distribution, hotels & catering benefited from the policy support given to consumer spending. This support is now at an end, and although consumer confidence appears high, it is, we believe, fragile. Assuming no collapse in confidence and spending, then modest but strengthening quarter-on-quarter growth through 2010 will result in growth for the year as a whole of 2%. The prospects are for growth to strengthen further in 2011 and then to weaken slightly to around 2% in 2012, when the impact of the measures to address the UK fiscal position might be greatest. The outlook throughout the forecast is for growth to be weaker than in the UK as a whole.

Source: Panel Forecasts, Spring 2010.

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Table 2 illustrates how growth might look across the region. Based on the industrial structures and past relative historical performance of sectors, growth in 2010 would be weakest in Greater Manchester, at ¾%. This sub-region accounts for 40% of the region’s economy and prospects in 2010 could be held back by relatively poor prospects in the public sector and non-financial business services. table 2: real gva growth within the northwest (% pa) 2010

2011

2012

2013

Cheshire

1.6

2.2

1.8

2.3

Cumbria

1.4

1.8

1.0

1.7

Greater Manchester

0.8

1.8

1.7

2.2

Lancashire

1.4

1.5

1.3

1.7

Merseyside

1.4

1.4

1.0

1.7

Northwest

1.2

1.8

1.5

2.0

Source(s): Panel Forecasts, Spring 2010 and Cambridge Econometrics.

In contrast, the prospects in Cheshire are supported by manufacturing. While manufacturing as a whole is expected to be one of the strongest performing sectors and the sector has a large presence in Cheshire, the sub-region also has strong representation in those parts of manufacturing where growth is expected to be relatively strong, such as food processing, chemicals and pharmaceuticals.

the downturn with lower hours and wage cuts helping to forestall cuts in jobs. A strengthening economy will give some support to employment, but growth is expected to remain weak and recent business surveys show little prospect of companies taking on more staff. Many staff who took on fewer hours will return to full time, and firms will look to ‘sweat’ their existing people assets harder before taking on many more new employees. Equally, the surveys do not point to further substantial job cuts that might have come from firms responding to disappointment over weakness of the pick-up in business.

The immediate prospect is for employment to fall by a further 1% in 2010, with government & other services still seeing the prospect of year-on-year increases on 2009, reflecting the increase in employment already seen since mid 2009. Over 2011-13, public sector employment is expected to fall alongside the cuts in public spending. The scale of the job losses is likely to exceed the increase in private sector employment, which we expect to be modest by historical standards, particularly in financial & business services. The outlook is therefore that non-employment will rise further in these years; the impact on unemployment will depend on how the job losses are achieved (e.g. through early retirement etc). We do not anticipate the Northwest economy achieving year-on-year growth in overall employment during the period of this forecast.

POINTS TO WATCH The key issues to monitor are:

EMPLOYMENT HAS HELD UP BETTER THAN EXPECTED BUT GROWTH IS NOT LIKELY TO RETURN UNTIL 2013 To date, employment levels have held up much better than would have been expected from the experience of past recessions. However data to 2009Q4 show employment falling steadily in all sectors, with the exception of education and health, with overall employment falling by 1¾%. However, the rate of decline in employment slowed sharply in the second half of the year. Similarly, the strong rise in claimant count unemployment ceased around mid-2009.

Firms have been reluctant to let core staff go, especially those talented ones which firms have invested in, recognising the costs of replacing them when the eventual recovery comes. Both firms and workers have been more flexible in their responding to

•

Whether manufacturing in the Northwest is able to benefit from the global recovery, and whether improvements in competitiveness are being translated into improved market share or to improved margins.

•

The plans for future government spending and the extent to which it may impact disproportionately on the Northwest.

•

Whether private sector construction activity recovers to compensate for the expected scaling back of public infrastructure projects.

•

Whether consumer confidence is less fragile than we currently think.

8

Northwest and UK GVA 2006–2013 table 3: Summary data and forecasts for the northwest Units as indicated and % growth pa GVA (£2005m)

Consumer Spending (£2005m)

Unemployment Rate (%)

2006

109,121 2.3

86,782 1.0

3.3 14.1

2007

110,818 1.6

89,467 3.1

3.1 -5.7

2008

111,427 0.5

90,042 0.6

3.4 8.5

2009

106,833 -4.1

86,934 -3.5

5.4 60.5

2010

108,104 1.2

86,302 -0.7

6 10.2

2011

110,003 1.8

87,496 1.4

6.4 7.6

2012

111,635 1.5

89,739 2.6

6.7 3.7

2013

113,869 2.0

92,050 2.6

6.8 1.2

Source(s): Panel Forecasts, Spring 2010.

table 4: Northwest and uk gva Units as indicated and % growth pa NW GVA (£2005m)

UK GVA (£2005m)

Nominal GVA per head (UK=100)

2006

109,121 2.3

1,126,869 3.2

85.5 -0.7

2007

110,818 1.6

1,157,346 2.7

85 -0.5

2008

111,427 0.5

1,165,695 0.7

85.6 0.6

2009

106,833 -4.1

1,108,025 -4.9

86.4 1.0

2010

108,104 1.2

1,121,356 1.2

86.4 0.0

2011

110,003 1.8

1,146,267 2.2

86.2 -0.2

2012

111,635 1.5

1,166,540 1.8

86.2 -0.1

2013

113,869 2.0

1,192,380 2.2

86.2 0.0

Source(s): Panel Forecasts, Spring 2010.

9

Northwest Sector Output KEY POINTS •

Prospects for manufacturing in the Northwest have improved since our Autumn 2009 forecast.

We now expect output growth of 3½% in 2010 and growth of almost 4% in 2011, with food processing and engineering and chemicals among the strongest sectors in the short term.

•

Construction output fell sharply in 2009, though only a modest recovery is forecast for 2010 as private sector demand remains weak. Although private sector work is likely to increase in 2011 and beyond, growth prospects for the sector overall will then be depressed by the scaling back of previously planned public sector projects.

•

Output in distribution, hotels & catering is thought to have held up well during 2009H2 in part due to supportive policy initiatives. We believe consumer confidence remains fragile and could weaken sharply in the face of future tax rises or further job losses. Nevertheless, the sector is likely to be among the strongest in 2010, with growth of 2% forecast.

MANUFACTURING: Output growth is expected to be slightly faster than that for the UK in 2010 The short-term outlook for manufacturing output has improved since our Autumn 2009 forecast, and we now expect growth of 3½% in 2010 and almost 4% in 2011. We still consider the immediate prospects for growth in the sector in 2010 to be stronger than for the sector in the UK as a whole. Manufacturing in the Northwest has benefited from the improvement to international competitiveness from the depreciation in sterling. At the same time some favourable corporate decisions have been taken.

The immediate outlook for motor vehicles, and its large regional supply network, has improved with the decision by General Motors not to sell its European subsidiaries but instead to invest in restructuring them. This decision was seen as improving the longer term outlook for the company’s Ellesmere Port plant.

In addition, Jaguar is consolidating production to its Halewood plant on Merseyside and closing a plant in the Midlands. It is anticipated that the additional production at Halewood will create around 800 jobs.

Companies in the Northwest’s Advanced Flexible Materials (AFM) sector are reporting a significant improvement in trading as previously-delayed investment decisions are now being made. Optimism is particularly strong in PPE (personnel protective equipment) and contract furnishing. Firms in the petro-chemicals segment are reporting strong demand from overseas, particularly Asia.

The Northwest also has a strong biomedical manufacturing base. Regional representatives for this sector report significant growth in the manufacture of vaccines over the last 12 months for the UK and international market, largely due to the swine flu outbreak. Looking forward, Medimmune is making a $40m investment at its Speke site which will take effect over the next three to six months. Some companies in the chemicals sector are also starting to see an upturn in sales, but are not yet talking of a major recovery, and concerns about the ongoing volatility of energy prices remain.

The food and drink sector has seen recent redundancies, and this risk continues in some firms.

For example, Warburtons in Bolton announced earlier this year that a quarter of its workforce is at risk of redundancy. That said, some in the region believe redundancies have not been as severe as might be expected due to favourable currency effects and because the sector is less dependent upon subsectors such as organic or luxury goods compared to elsewhere in the UK. The longer term importance of manufacturing to the region is recognised by a ten-year Manufacturing and Action Plan, announced by the NWDA in late 2009. The plan for developing the sector focuses on improving the links between manufacturing and academia in order to increase innovation and raise the profile of manufacturing in the Northwest.

CHART 6: GVA IN MANUFACTURING % pa 4 2 0 -2 -4 -6 -8 -10 -12

2006

2007

2008

2009 NW

2010

2011

2012

2013

UK

Source: Panel Forecasts, Spring 2010.

10

CONSTRUCTION: growth is expected to return in 2010 but will remain weak until 2013 Construction output in 2010 as a whole is expected to show a modest 1% increase after a fall of around 9% in 2009. The modest growth contrasts with the outlook for the sector nationally, where a further fall of ¼% is forecast.

One factor supporting the sector in 2010 is the scale of public sector investment, which currently accounts for 35-40% of all construction orders placed in the region. For example, the project to implement phase 3a of Manchester’s Metrolink will continue to boost construction in the region through to the end of 2011.

The £575m project will extend the metrolink 20 miles over 26 new stops to Oldham and Rochdale and is due to be completed in October 2011.

However, the boost from government spending on regeneration is weakening as a number of major projects have now been completed and the tightening of government budgets from 2011 will take its toll.

An offsetting effect will come from a recovery in private-sector house-building which is expected to gather pace. The region might also benefit disproportionately from nuclear new build, which is due to be commissioned over the next year.

In early 2010, there have been continued signs of recovery in the property market in the Northwest with house price increases over the course of the first quarter. There is also improved sentiment among some in the building services sector, such as architects and engineering, that new plans are beginning to be worked on. However, there is little evidence yet that private sector projects are being started on the ground.

CHART 7: GVA IN CONSTRUCTION

DISTRIBUTION, HOTELS AND CATERING: Output recovered strongly during 2009 but the recovery remains fragile Nationally, household spending has remained relatively strong (until 2010Q1) given the scale of the recession, and as a result output in the sector proved unexpectedly strong in 2009H2. There are signs that consumer spending in the region has performed similarly, with sales in December at Liverpool’s new shopping complex, Liverpool One, markedly higher than in the previous year with an even larger increase in footfall at the complex.

However, we believe consumer confidence both nationally and in the Northwest to be fragile. It is unclear how much spending consumers brought forward as a result of measures to stimulate demand.

Consumer confidence and spending could be greatly weakened later in the year in response to fiscal tightening. The Northwest may be more susceptible to falls in confidence than other regions because of the relatively high proportion of jobs in the public sector. Panel members have seen large brewers in the hospitality sector taking capital out of the market, and a focus on increasing margins (rather than market share) through significant price rises.

Even on the assumption of modest but strengthening quarter-on-quarter growth through 2010, the prospect is that growth for the year as a whole will average 2% due to the strong recovery seen in 2009H2.

Nevertheless, this will be slightly weaker growth than is forecast for the sector nationally. The prospects are for growth to strengthen further in 2011 but then to weaken slightly to around 2% in 2012, when the impact of the measures to address the UK fiscal position might be greatest. The outlook throughout the forecast is for growth to be weaker than in the UK as a whole.

% pa 4 2 0 -2 -4 -6 -8 -10 -12 -14 2006

CHART 8: GVA IN DISTRIBUTION, HOTELS & CATERING % pa 6 4 2 2007

2008

2009 NW

2010 UK

Source: Panel Forecasts, Spring 2010.

2011

2012

2013

0 -2 -4 -6 2006

2007

2008

2009 NW

2010

2011

2012

2013

UK

Source: Panel Forecasts, Spring 2010.

11

TRANSPORT AND COMMUNICATIONS: The sector should be one of the stronger sectors in 2010

FINANCIAL AND BUSINESS SERVICES: The prospects for recovery are weaker than for the UK as a whole

Passenger numbers travelling through the region’s two main airports fell by around 10% and cargo traffic by 30% in 2009. Further investment in facilities and routes offered will assist some recovery in passenger numbers in 2010 alongside improved economic conditions. A £50m refurbishment of Manchester Airport’s Terminal One was completed in 2009 which increased its capacity to 11m passengers a year, compared with 2.5m previously. Liverpool John Lennon Airport has been expanding for some time and is expected to continue to increase the number of routes it serves. Easyjet has announced new routes from Liverpool to Malta, and in December 2009 RyanAir announced an expansion of the routes it will fly from the airport from summer 2010.

According to a report on ‘Global Location Trends’ published by IBM in January 2010, Manchester has overtaken cities such as Chicago and Frankfurt to become the world’s 15th investment ‘hotspot’. Much of this investment in recent years has come in the form of large, multi-national business services firms opening offices in the city. Recent examples include Google, Bank of New York and Credit Suisse. The city’s Spinningfields financial and business services district has been the location of many of these investments and is strengthening its position as a financial and business service cluster.

Elsewhere in the sector, further investment in Manchester’s Metrolink will also support output in the sector. The Metrolink is being extended to Oldham and Rochdale and new services to these destinations will be in operation by 2011. Furthermore, Network Rail has recently published its plans to develop the ‘Northern Hub’, which will help to tackle rail congestion in the Manchester city region’s rail network and connectivity with other cities across the North.

More recently plans for a Y-shaped High Speed Rail network have been announced, with one branch running through to Manchester and then Liverpool.

Overall, the outlook for the sector is for growth to track that for the UK as a whole, with growth of 2¼% expected in 2010 following a fall of almost 5% in 2009. Prospects are likely to strengthen further in 2011 supported by a pickup in manufacturing and business services activity in particular, with growth reaching 3¼%.

CHART 9: GVA IN TRANSPORT & COMMS % pa 6 4 2 0 -2 -4 -6 2006

2007

2008

2009 NW

2010 UK

Source: Panel Forecasts, Spring 2010.

2011

2012

2013

Despite welcome investments by international companies, only a small proportion of the jobs in financial and business services in the Northwest are in high value-added activities similar to those carried out in, for example, the City of London. The creation of call centres by financial services companies helped support relatively fast rates of growth of 5-6% pa in this sector in the Northwest prior to the recession.

However, it may be a factor holding back recovery as the sector continues to restructure and cut costs, and increased online business lowers demand for call centre functions.

The Northwest’s call centre industry has experienced some closures and job losses recently, with over 400 jobs being cut at the Burnley call centre of Shop Direct and United Utilities and British Gas reportedly considering significant job cuts. At the same time, some in the industry report signs that firms are bringing back to the UK call centre functions that had been placed overseas.

It is reported by a regional sector representative that parts of the financial and professional services in the region initially expected a ‘short-sharp’ downturn and took the decision to keep staff and to accept the resulting impact on profitability. As the downturn became more prolonged firms have taken the opportunity to carry out business-planning in readiness.

There are some signs of increased confidence in the sector, but nothing substantial to date, and uncertainties around public sector spending cuts and future taxation policy remain a concern. An increasing number of firms are finding it hard to source credit, and are turning to equity to strengthen their financial basis, albeit a more expensive form of debt finance.

12

It remains our view that the immediate prospects for growth in the sector are weaker than for the UK as a whole given the lower value-added nature of services provided. Growth for 2010 as a whole is thought likely to average just 1%. Prospects are expected to strengthen towards the end of 2010 and beyond, with growth rising to 3½% pa in 2013. Even so, output does not return to pre-recession levels until 2012.

% pa

CHART 11: GVA IN PUBLIC AND OTHER SERVICES

3 2 1 0 -1 2006

2007

2008

2009 NW

CHART 10: GVA IN FINANCIAL & BUS. SERVICES % pa

2010

2011

2012

2013

UK

Source: Panel Forecasts, Spring 2010.

8 6 4

POINTS TO WATCH

2 0 -2 -4 -6 2006

2007

2008

2009 NW

2010

2011

2012

•

We will continue to monitor manufacturing in the Northwest for evidence that the region’s firms are benefiting from a global recovery, and whether improvements in competitiveness are being translated into improved market share or to improved margins.

•

We will monitor the plans for future government spending and the extent to which it may impact disproportionately on the Northwest.

•

We will monitor whether private sector construction activity recovers to compensate for the expected scaling back of public infrastructure projects.

•

We will continue to monitor available indicators of consumer confidence for signs that the apparent strength in household spending is altering.

2013

UK

Source: Panel Forecasts, Spring 2010.

GOVERNMENT AND OTHER SERVICES: Cuts in government spending could affect the Northwest disproportionately The dominating factor influencing the prospects for this sector is the outlook for government spending.

This clearly affects the output of public administration, education and health directly, but it also indirectly influences much of the other services activities through its financial support to social and cultural activities.

The scale and scope of the cuts in public spending remain far from certain at present, but it is clear that the circumstances through the period of our forecast will be in sharp contrast to that seen during the last decade.

On an assumption that government spending in real terms falls year on year from 2011 to 2013, the outlook is for output in the sector in the Northwest to fall further throughout our forecast. The large relative size of the public sector in the Northwest make it likely that the impact of spending cuts will be marginally greater than for the UK as a whole, but we welcome the further work that has been commissioned by regional bodies into this. More generally, we will keep a very close eye on the prospects of the public sector throughout the course of 2010.

13

Northwest Sector Output 2006–2013 table 5: northwest sector output

Agriculture

Mining and Quarrying

Manufacturing

Electricity, Gas and Water

Construction

Distribution, Hotels and Catering

Transport and Communications

Financial and Business Services

Government and Other Services

Total

ÂŁ2005m and % growth pa

2006

581 4.0

172 0.0

19,155 2.0

1,338 0.0

7,130 1.4

17,138 1.9

8,337 2.0

21,132 6.0

25,915 0.5

109,121 2.3

2007

535 -8.0

168 -2.6

19,080 -0.4

1,318 -1.5

7,315 2.6

17,460 1.9

8,484 1.8

22,098 4.6

26,105 0.7

110,818 1.6

2008

548 2.5

137 -18.2

18,593 -2.6

1,304 -1.1

7,423 1.5

17,325 -0.8

8,605 1.4

22,598 2.3

26,557 1.7

111,427 0.5

2009

530 -3.3

101 -26.7

17,106 -8.0

1,191 -8.7

6,756 -9.0

16,609 -4.1

8,184 -4.9

21,482 -4.9

26,479 -0.3

106,833 -4.1

2010

546 3.1

98 -2.9

17,701 3.5

1,195 0.3

6,826 1.0

16,937 2.0

8,365 2.2

21,709 1.1

26,436 -0.2

108,104 1.2

2011

553 1.2

98 0.6

18,387 3.9

1,183 -1.0

6,940 1.7

17,373 2.6

8,629 3.2

22,458 3.5

26,103 -1.3

110,003 1.8

2012

555 0.5

99 0.7

18,756 2.0

1,187 0.3

7,044 1.5

17,726 2.0

8,871 2.8

23,189 3.3

25,907 -0.8

111,635 1.5

2013

558 0.5

100 0.5

19,138 2.0

1,194 0.6

7,266 3.2

18,133 2.3

9,152 3.2

23,999 3.5

25,797 -0.4

113,869 2.0

Source(s): Panel Forecasts, Spring 2010.

14

Northwest Expenditure KEY POINTS •

There are signs that retail sales have held up in early 2010 and Northwest consumers started 2010 among the most confident in the UK. Nevertheless, we expect household spending to fall by ¾% in 2010 after falling by 3½% in 2009 as the continuing weak labour market and relatively high price inflation keep consumer confidence weak.

•

Investment is expected to fall by around 2¾% in 2010 with most sectors other than financial & business services contributing to the decline.

Further expected cuts in public sector investment will be a major factor restricting investment in subsequent years.

HOUSEHOLD SPENDING: Weak consumer confidence will constrain spending for several more years Nationally, household spending increased relatively strongly in 2009Q4, and we expect this to mark a sustained recovery in spending through 2010 and beyond. However, the rate of quarter-on-quarter growth through 2010 is likely to remain modest as consumer confidence remains weak in the face of weak job prospects.

The partial evidence on spending in the Northwest suggests it has followed a similar profile to that for the UK. The consumer spending index for the region constructed for NWDA by Experian using the GfKNOP Consumer Confidence Barometer tracked the changes for the UK through 2009, as it had through 2008. The survey reports that around mid-2009 the balance of households in the region began to feel more optimistic about their future financial position, and this balance increased through the year. The number of visitors to retail centres in the region is also reported to have increased through second half of the year. The Nationwide Consumer Confidence Index for the end of 2009 reported consumers in the Northwest to be the most confident in the UK with the exception of Scotland.

Despite the latest survey data we maintain our previous view that the growth in household spending will be weaker in the Northwest than in the UK as a whole. We anticipate overall household spending falling by ¾% in 2010 (having fallen by 3½% in 2009) as continued weakness in the regional labour market and relatively high consumer price inflation weaken

consumer confidence. We expect 2011 to mark the return to year-on-year spending growth, although it will not be until 2012 that growth is likely to return to pre-recession rates and it will be 2013 before spending exceeds the level in 2008. Growth in 2011 is likely to be modest, at around 1½%, as the concerted effort to make finances more sustainable are likely to strengthen.

FIXED INVESTMENT: Investment intentions remain weak and increases are not expected before 2011 in most sectors Our assessment of regional investment is made in the absence of published data. It is our view that investment in the Northwest had been relatively strong in the years leading up to the recession, but that it has suffered slightly more than the UK as a whole in the downturn in 2008 and 2009.

There is little evidence that investment sentiment is improving. The British Chamber of Commerce survey for 2010Q1 reports a balance of manufacturing companies in the Northwest have revised down investment plans, while a similar number of service companies have revised them up as revised them down. This represents a more pessimistic view than for manufacturing in the UK as whole but a slightly more favourable position for services. Regional observers note that where manufacturing is investing it is related to improving efficiency and developing new products.

Little investment is being made to increase capacity.

Looking beyond the private sector, the actions that the new administration takes to address the public finances will determine the prospects for public sector investment.

We expect investment to fall by 2¾% in 2010, following a fall of almost 15% in 2009. Most sectors are expected to see lower investment in 2010, with the exception of financial & business services, with the sharpest fall expected in education and health. 2011 should mark the return to year-on-year increases in investment, with manufacturing among the sectors achieving the strongest growth. However, overall growth will be held back by the outlook for public sector investment, which could fall in real terms through to 2013.

15

Components of Northwest Expenditure 2006–2013 table 6: northwest expenditure £2005 and % growth pa Household Expenditure

Government Consumption

Investment

Exports

Imports

2006

86,782 1.0

26,711 1.6

21,309 6.9

78,082 1.1

103,675 2.4

2007

89,467 3.1

27,073 1.4

23,168 8.7

78,525 0.6

106,748 3.0

2008

90,042 0.6

27,821 2.8

22,348 -3.5

77,729 -1.0

105,795 -0.9

2009

86,934 -3.5

28,348 1.9

19,014 -14.9

150,894 94.1

122,141 15.5

2010

86,302 -0.7

28,654 1.1

18,504 -2.7

153,758 1.9

125,171 2.5

2011

87,496 1.4

28,415 -0.8

18,825 1.7

159,140 3.5

127,969 2.2

2012

89,739 2.6

28,303 -0.4

19,320 2.6

164,021 3.1

130,967 2.3

2013

92,050 2.6

28,382 0.3

20,272 4.9

169,431 3.3

134,400 2.6

Source(s): Panel Forecasts, Spring 2010.

table 7: northwest household income and spending Units as indicated and % growth pa Household Disposable Income (£m)

Household Spending (£m)

Saving (£m)

Saving Ratio (% of disp. income)

Household Disposable Income (£2005m)

Household Spending (£2005m)

2006

86,832 3.3

89,090 3.7

-2,258 20.2

-2.6 16.3

84,582 0.6

86,782 1.0

2007

89,479 3.0

94,526 6.1

-5,047 123.5

-5.6 116.9

84,690 0.1

89,467 3.1

2008

93,640 4.7

97,971 3.6

-4,331 -14.2

-4.6 -18.0

86,062 1.6

90,042 0.6

2009

96,203 2.7

95,708 -2.3

495 -111.4

0.5 -111.1

87,383 1.5

86,934 -3.5

2010

98,530 2.4

96,969 1.3

1,560 215.4

1.6 208.0

87,691 0.4

86,302 -0.7

2011

102,419 3.9

101,005 4.2

1,414 -9.4

1.4 -12.8

88,721 1.2

87,496 1.4

2012

107,469 4.9

106,417 5.4

1,052 -25.6

1.0 -29.1

90,626 2.1

89,739 2.6

2013

112,924 5.1

111,944 5.2

980 -6.9

0.9 -11.4

92,856 2.5

92,050 2.6

Source(s): Panel Forecasts, Spring 2010.

16

Northwest Labour Markets KEY POINTS •

•

•

Employment in the Northwest fell by 1¾% in 2009 following a slight fall in 2008; 0.5 pp worse than we expected in our Autumn 2009 forecast.

Employment is forecast to fall by a further 1% in 2010. The strongest falls are expected in manufacturing, financial and business services and construction.

While the scale of employment decline in the region during the recession was not as severe as for the UK overall, future employment growth is expected to be weaker. Employment growth is expected to fall year on year to 2013, a year longer than expected for the UK as a whole.

Claimant count unemployment in the region averaged 5.4% of the workforce in 2009, well above the UK average of 4.7%. Unemployment is forecast to continue to increase through to 2013.

EMPLOYMENT: Employment fell in 2009 and is expected to do so through to 2013 Recent data show that employment stabilised in the final quarter of 2009 both nationally and regionally. In our Autumn 2009 forecast we expected employment to fall by 2.25% in 2009; observed flexibility in the labour market has led us to revise this to a fall of 1.75%. In comparison, UK employment is forecast to decline by 2.1%. In 2010, Northwest employment is forecast to decline by a further 1.2% compared with a 1.5% decline for the UK overall. Recent data show that throughout 2009 employment declined in all sectors with the exception of public admin, education and health. While labour market flexibility and a willingness amongst staff to job-share or work fewer hours has helped reduce the employment losses during the recession, it has resulted in a large increase in those working part time who would want to work full time. Also, some firms (particularly those in manufacturing) have been reluctant to cut capacity in response to falling demand, as this would require significant ‘chunks’ of the workforce to be removed which are difficult to replace when demand picks up. Instead, such firms have turned to pay freezes, creative reward schemes and cash conservation (including freezing Capex) rather than job cuts.

As a result, under-employment is currently an issue, and as the recovery becomes established and firms look to increase output, the impact on the number

of people in employment is likely to be less than the increase in hours worked. Recruitment is likely to be slow as the part-time/short-time trend is reversed.

CHART 12: RECENT DEVELOPMENTS IN THE LABOUR MARKET % Workforce

%

12 10 8 6 4 2 0 -2 -4 -6 2006

2007

2008

NW Unemp

2009

2010

UK Unemp

2011

NW Empl

2012

6.0 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 2013

UK Empl

Source: Panel Forecasts, Spring 2010.

We expect overall employment in the region to continue to fall through to 2013, with the expected scale of job losses in the public sector exceeding increases in private sector employment from 2012.

The overall outlook is that employment will fall by a further 0.3% in 2011, 0.5% in 2012, and by 0.1% in 2013. The rate of employment decline in the region in the short term is expected to be slower than we forecast in Autumn 2009, reflecting an indication that the labour market has been more resilient during the recession than previously thought, but we also now expect the period of decline to be longer.

The majority of large employment sectors in the region are expected to see year-on-year falls in employment in 2010 but then to see employment growth.

Manufacturing employment is expected to recover slightly in 2011 stimulated by strong output growth, but then to fall back from 2012 as growth weakens towards trend. The expected cuts in government spending over 2012-13 are thought likely to result in employment in government and other services (public administration, education and health) falling year-onyear through 2013.

CHART 13: NORTHWEST SECTORAL EMPLOYMENT GROWTH

% pa 6 4 2 0 -2 -4 -6 -8 2008

2009

2010

2011

2012

2013

Manufacturing

Construction

Distribution

Transport & communication

Financial & business services

Government & other services

Source: Panel Forecasts, Spring 2010.

17

UNEMPLOYMENT: Further increases are expected over the forecast period but at a much reduced rate Unemployment in the Northwest as measured by both the claimant count and wider ILO definition stabilised in the second half of 2009 and into 2010. In January 2010, ILO unemployment in the Northwest stood at 8.6% of the labour force while the latest claimant count rate (February 2010) stood at 5.6%. In both cases these rates are higher than for the UK as a whole.

Since the beginning of 2008 ILO unemployment in the region increased at a similar rate as nationally; however the rate of growth of the Northwest claimant count over the last two years has been slower than the UK average. The broad picture is that the increases in unemployment over the last year have been greater in those parts of the region where rates of unemployment were already highest. However, there are exceptions such as Knowsley where unemployment rates are higher than the regional average but the increase in the last year has been lower; and Salford, which had a similar unemployment rate to Blackburn in February 2009 (at 4¾%) but experienced a much larger increase than that seen in Blackburn. At the same time, Carlisle and Chorley have a slightly lower number of residents unemployed than a year earlier.

Long-term youth unemployment has become a significant concern for the region. While the total number of long-term claimants doubled in the 12 months to Feb 2010, long-term claimants aged under 24 years more than tripled to over 3,200. Areas that have seen significant increases are the districts of Greater Manchester as well as Liverpool.

Although recent increases in unemployment in the region have been relatively benign, we expect unemployment to rise further through the forecast period as overall employment falls further.

POINTS TO WATCH •

We will continue to monitor for evidence that job losses are resulting from changes in public spending.

•

We will continue to monitor the spatial implications of future changes in unemployment.

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Northwest Labour Markets 2006–2013 table 8: northwest Labour market Units as indicated and % growth pa Employees in Employment (000s)

Employment (000s)

Unemployment (000s)

Unemployment Rate (NW)

Unemployment Rate (UK)

2006

2,980 -0.6

3,370 -0.3

116 14.0

3.3 14.1

2.9 8.5

2007

3,011 1.0

3,410 1.2

110 -4.8

3.1 -5.7

2.7 -9.0

2008

3,003 -0.3

3,407 -0.1

120 8.7

3.4 8.5

2.8 4.1

2009

2,946 -1.9

3,348 -1.7

193 61.1

5.4 60.5

4.7 69.5

2010

2,915 -1.1

3,310 -1.1

211 9.6

6.0 10.2

5.4 13.5

2011

2,911 -0.1

3,300 -0.3

228 7.8

6.4 7.6

5.8 9.1

2012

2,901 -0.3

3,285 -0.5

236 3.5

6.7 3.7

6.1 4.4

2013

2,900 0.0

3,280 -0.2

238 1.1

6.8 1.2

6.1 0.5

Source(s): Panel Forecasts, Spring 2010.

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Northwest Sector Employment 2006–2013 table 9: northwest sector employment

Agriculture

Mining and Quarrying

Manufacturing

Electricity, Gas and Water

Construction

Distribution, Hotels and Catering

Transport and Communications

Financial and Business Services

Government and Other Services

Total

000s and % growth pa

2006

22 8.5

2 -4.2

403 -5.0

8 7.3

214 -6.3

789 -1.1

217 2.3

621 3.1

1,094 0.7

3,370 -0.3

2007

28 29.1

2 4.9

401 -0.5

10 16.6

230 7.4

783 -0.8

210 -3.0

649 4.6

1,097 0.3

3,410 1.2

2008

29 3.7

3 48.8

399 -0.6

10 8.1

224 -2.7

783 0.0

212 0.9

641 -1.2

1,106 0.8

3,407 -0.1

2009

30 2.1

3 -1.5

372 -6.6

10 -6.4

232 3.8

760 -3.0

211 -0.5

609 -5.1

1,122 1.5

3,348 -1.7

2010

31 5.4

3 -2.1

360 -3.3

9 -2.8

228 -2.0

749 -1.4

214 1.3

589 -3.3

1,127 0.4

3,310 -1.1

2011

30 -2.4

3 -0.9

362 0.5

9 -3.5

229 0.6

754 0.6

218 1.8

594 0.8

1,102 -2.2

3,300 -0.3

2012

30 -3.0

3 -0.8

361 -0.3

9 -1.6

230 0.5

757 0.4

218 0.1

599 0.9

1,078 -2.1

3,285 -0.5

2013

29 -3.1

3 -1.0

359 -0.3

9 -1.7

235 2.1

761 0.6

220 1.0

604 0.7

1,060 -1.7

3,280 -0.2

Source(s): Panel Forecasts, Spring 2010.

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Northwest Prices and Earnings KEY POINTS •

•

•

In April Consumer Price Inflation (CPI) accelerated to 3.7%, up from 3.4% in March, exceeding January’s 14 month peak of 3.5%. The recent upward pressure on prices has largely come from the restoration of the 17.5% VAT rate and the upward movement of the price of crude oil.

Inflation is expected to continue to remain significantly above the 2% inflation target over the next few months despite the continued slow recovery. However, as the impact of one-off shocks to the price level work their way through, downward pressure from spare capacity in the economy is likely to cause inflation to fall back below the inflation target for a period.

Labour cost pressures weakened throughout 2009 as employees reacted to the continued threat of unemployment. Average earnings inflation (excluding bonuses) has increased slightly recently, at 1½% in February 2010, and remains much below rates in previous years.

PRICES AND INFLATION In our Autumn 2009 forecast we expected inflation to remain muted throughout 2009; this has largely been borne out with inflation only exceeding the 2% target rate in December. However Consumer Price Inflation (CPI) has been at or above 3% since the turn of the year, and increased to 3.7% in April from 3.4% in March. The upward pressure on inflation is largely the result of the return of the standard rate of VAT to 17.5% in January, the upward movement of the price of crude oil and the significant depreciation of sterling during 2009. The annual rate of change of the Retail Price Index (RPI) was 5.3% in April, up from 4.4% in March and just 3.7% in February. This was the sixth consecutive month of rising inflation on this measure reflecting increased mortgage interest payments over the year compared with significant falls in payments a year earlier. Other notable inflationary pressures came from fuel and lighting, motoring expenditure (specifically petrol) and the increasing cost of food and clothing and footwear.

Producer price inflation has been on an upward trend since August 2009 as a result of rising commodity prices coupled with the significant decline in the value of sterling. Output prices rose over the year to April at a rate of 5.7% compared with an increase

of 5% in the year to March and 4.2% in the year to February. The increase in inflation, mainly reflects price rises in petroleum, other manufactured and chemical products.

Input prices have also been on an upward trend since August 2009, and in the year to April 2010 prices rose by 13.1% compared with a rise of 10.3% in the year to March. April marked the sixth consecutive month in which input costs grew at a faster rate than output costs; highlighting the fact that firm margins remain under pressure, especially as their ability to pass on full cost increases remains somewhat restricted by increased competitive pressures.

Inflation is expected to remain above the 2% Bank of England inflation target for the next few months despite the continued slow recovery as the impact of recent tax increases (VAT and Budget increases), higher global commodity prices (particularly oil) and weaker sterling have an effect. It is expected that as these temporary factors begin to subside downward pressure from the margin of spare capacity in the economy is likely to mean inflation falls back to its target rate.

The British Chambers of Commerce (BCC) Survey for 2010Q1 indicates that as economic growth has returned the pressure to raise prices has increased.

The position of manufacturing and service firms in the Northwest is reported to be similar to those for the sectors nationally. The increased pressure to raise prices continues to be driven by cost-push factors rather than demand pull.

EARNINGS: Wage inflation remains subdued Nationally the three month measure of average earnings including bonuses increased by 2.1% in the year to February 2010, up from a rate of 0.9% in January; earnings excluding bonuses (i.e. regular pay) rose by 1.5% in the year to February, up from 1.3% in January. There remains a difference in the growth in public and private sector pay, but this gap is shrinking; public sector pay having risen by 2.3% during the year compared with an increased of 1.2% in the private sector.

The BCC survey for 2010Q1 indicates that pressure firms in the region face for wage settlements are similar to those nationally, and has not picked up noticeably recently.

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Reflecting the prospects that the labour market will strengthen in the latter half of the forecast period, we expect average earnings growth to pick up in 2011 and through to 2013.

22

Northwest Prices and Earnings 2006–2013 table 10: northwest prices and costs Units as indicated and % growth pa 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)

2006

19,766 3.9

21,868 3.4

198.1 3.2

192.0 2.1

102.6 2.6

2007

20,671 4.6

23,107 5.7

206.6 4.3

198.9 3.6

105.2 2.5

2008

21,012 1.7

23,798 3.0

214.8 4.0

208.1 4.6

108.3 3.0

2009

21,367 1.7

24,178 1.6

213.6 -0.6

212.2 2.0

109.4 1.0

2010

21,671 1.4

24,512 1.4

219.2 2.6

217.5 2.5

111.5 1.9

2011

22,219 2.5

25,119 2.5

226.4 3.3

224.0 3.0

114.3 2.5

2012

23,003 3.5

26,003 3.5

229.6 1.4

229.5 2.4

117.1 2.4

2013

23,984 4.3

27,096 4.2

235.5 2.5

235.3 2.6

119.6 2.2

Source(s): Panel Forecasts, Spring 2010.

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Northwest Construction and Housing KEY POINTS •

Construction output declined sharply in 2009, with private house-building and commercial property development in particular cut back sharply. Public sector work picked up towards the end of 2009 but there is no sign yet of a sustained increase in orders. The prospect is for output to stabilise in 2010 before then rising at modest rates.

•

House prices in the Northwest grew in the second half of 2009. However this followed quarteron-quarter declines since 2007Q4. The rate of pick-up in regional house prices is similar to the national average.

CONSTRUCTION ORDERS: There is no sign of a sustained increased in new orders Construction orders placed in the region fell by over 25% in 2008 as the industry felt the impact of the recession first. Although orders rose quarter-onquarter through much of 2009 these increases were almost entirely related to public sector or infrastructure investment. Private sector construction orders remained subdued throughout 2009, significantly below levels recorded before the economic downturn, and the total value of orders placed in 2009 was still 4% lower than in 2008.

The fall in construction output for 2009 was much greater than the fall in orders, at almost 20%.

However, the pattern of the fall was the same as for orders, with private house-building and private commercial work most badly affected.

As yet there is no evidence that orders for private sector work are beginning to increase. This is potentially worrying as the likelihood is that public sector work will fall back with the reassessment of public spending carried out by the new administration.

HOUSE PRICES: House prices grew in 2009H2 House prices and the number of property transactions grew in 2009H2 in both the Northwest and nationally after a year and a half of declines. Prices in the Northwest in 2009Q4 were 5.2% higher than at their lowest point in 2009Q2, a similar growth rate as nationally (5.4%). The latest data for Northwest housing transactions (for 2009Q4) report that the

number of sales has nearly doubled since its trough in 2009Q1.

Since mid-2009 there have been increases in house prices and mortgage approvals. However, it is thought that such improvements do not represent the start of a sustained recovery in the market, with limited stock for sale putting upward pressure on prices, any increase in supply could curb this trend. There is some suggestion that house prices have begun to move ahead of the general economic recovery and that future low growth in household income and weak labour market conditions could dampen housing demand going forward.

HOUSING INVESTMENT: Housing investment is expected to remain weak Changes have been made to the way data on housing starts are collected which means that estimates for housing starts the end of 2009 are inconsistent with those for earlier in the year. It is expected that consistent timeseries will be available in due course.

As a result there is little evidence to show how this important part of the construction sector has performed recently. Data for mid-2009 show housing starts were still 40-45% below the levels of a year earlier (and those in turn were 40% lower than in 2007), and the scale of the fall was far more severe than was seen in England as a whole.

There is no evidence yet that housing schemes are beginning to be restarted, but neither are there signs that activity is still being cut back. As a result, housing investment will remain weak in 2010.

CHART 14: RECENT DEVELOPMENTS IN THE HOUSING MARKET % pa 55 45 35 25 15 5 -5 -15 -25 -35 -45 -55 -65

2002Q1 2003Q1 2004Q1 UK house prices

2005Q1

NW house prices

2006Q1

2007Q1 2008Q1

ENG transactions

2009Q1 NW Transactions

Source: Communities and Local Government.

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