Economic Overview Barry Naisbitt Chief Economist Economic Analysis International Enterprise Promotion Convention , Harrogate 8th November 2010 United Kingdom

Economic Overview Out of recession The importance of smaller businesses Outlook – challenging times remain

UK economic activity recovering After contracting for 6 successive quarters, the UK emerged from recession in the final quarter of 2009. The initial estimate of Q3 GDP growth was 0.8% q/q, stronger than the consensus estimate of 0.4% q/q . That said, it was a slowdown from the unusually strong growth in Q2’10. The level of GDP is now estimated to have fallen by 6.5% in the recession, which was deeper than in the early 1990’s, but output is 2.8% up from its low point. Real GDP Growth (%) Source – ONS

Global growth is expected to continue, but not rapidly In October, the IMF revised up its economic forecasts slightly for 2010 but kept the outlook for 2011 broadly unchanged at a global level. The IMF said the recovery had proceeded better than expected, but with activity recovering at varying speeds. Global GDP Outlook (annual % change) Source – IMF World Economic Outlook October ‘10 update

Inflation Rates (% annual) In the recession, the UK inflation rate has been rather elevated compared to other major economies, such as the US and the Eurozone. The UK did not see a phase of deflation on the CPI inflation measure, unlike the US and the Eurozone. RPI inflation, however, did hit negative territory, as housing costs fell sharply. Commentators have a spread of concerns ranging from rising inflation to a worry about deflation occurring. Inflation Rates (% annual) Source – ONS, BLS

International Comparison (US/ EU/ UK) Importance of smaller businesses internationally In terms of value added, smaller businesses currently contribute around 50% of UK GDP. Although international comparisons are difficult to make precisely, smaller businesses account for over 50% of total employment in the major Western economies. Over the past decade, both the number of smaller businesses and the number of people they employ have grown. International Comparison (US/ EU/ UK)

Growth in UK smaller businesses The number of SMEs in the UK increased steadily over the past decade to almost 5 million in 2009. More than a quarter of SMEs were in financial business services in 2009. The next largest sector is construction. About 15% of the total number are in wholesale/ retail trade, hotels and restaurants. In 2008, around 270,000 new businesses started in the UK, but around 219,000 closed operating, resulting in a net gain of 51,000 new businesses – higher than the average net creation since 2000. The number of UK SMEs Source – BIS SME Statistics Definition of SME here : Companies with less than 250 employees.

Number of people employed by SMEs Over 13 million employed The number people employed by SMEs increased steadily over the last decade. It fell back somewhat in the recession, but there are 13.6m employed in 2009. SMEs account for about 60% of total UK private sector employment. In the economic recovery phase in the UK, and in other economies, smaller businesses are being seen as crucially important for creating jobs. Number of people employed by SMEs Source – BIS SME Statistics

Manufacturing SMEs Business Optimism (net balance indicator) Smaller business optimism has become positive SMEs business optimism has recovered from its low point at the depths of the recession. It has moderated recently, reflecting somewhat weaker expectations for both output and orders. Economic uncertainty continues to be a major headwind. Manufacturing SMEs Business Optimism (net balance indicator) Source – CBI (Survey on Manufacturing SMEs), July ‘10

Demand uncertainty is limiting investment The recent CBI SME survey indicated that ‘uncertainty about demand’ continues to be the factor most prominent in limiting investment. Shortage of internal finance and the inability to raise external finance have reduced recently as reported limiting factors. All three factors rose during the recession when investment spending was significantly reduced. 12 month forecasts of factors likely to limit capital expenditure authorisations ( % balance ) Int finance shortage Inability to raise ext finance Uncertainty about demand 01/06/2005 01/09/2005 18 6 54 01/12/2005 20 5 57 01/03/2006 18 7 57 01/06/2006 19 7 53 01/09/2006 18 4 51 01/12/2006 19 5 58 01/03/2007 17 3 53 01/06/2007 20 4 52 01/09/2007 19 3 53 01/12/2007 18 4 53 01/03/2008 16 5 48 01/06/2008 16 5 59 01/09/2008 18 10 64 01/12/2008 25 11 70 01/03/2009 26 14 70 01/06/2009 22 11 60 01/09/2009 29 16 56 01/12/2009 30 9 53 01/03/2010 19 11 61 01/06/2010 16 8 61 Source – CBI Quarterly SME Trends Survey, July ‘10

Business confidence has risen UK manufacturing companies are now more confident about future demand than a year ago when the UK economy was still in recession. The output expectation component of the CBI survey suggests that the confidence in output trends has risen back to around pre-crisis levels, but businesses remain cautious. CBI Industrial Trends Survey: Volume of Output in the next 3 months Source – CBI

Investment intentions picking up The recession saw a peak-to-trough fall of 28% in business investment. However in the recovery phase, business investment has now risen from the trough in Q4’09. The Bank of England Agents have noted reports of businesses planning to invest more in the year ahead, with many of them focusing on asset replacement and maintenance. Businesses remained cautious about capital expenditure, primarily due to uncertainty of future demand. Investment Intentions (score) From the Bank of England Agents’ Summary of Business Conditions Source – Bank of England, Agents’ Summary of Business Conditions, October ‘10

Growth expected but still challenging times remain The recession hit deeply in the UK and US but many emerging market economies were much less affected – so global growth fared less badly. The UK and US economies have grown since late 2009. According to the consensus forecasts, the UK economy is expected to grow by about 2% in 2011. There are still considerable headwinds to growth and the prospects have been described as “choppy”. These remain challenging times for all businesses. Global GDP Outlook (annual % change) Source – World and US: IMF World Economic Outlook October ‘10 update, UK: Consensus Forecasts