1. Ivan Perkovic Head of Economic Research South East Economy Update & Potential impact of public sector cuts on the South East (December 2010 Update) January 2011 South East Business Development Advisory Group/Business Link Advisory Group

2. Overview Economy Update –Business activity and new orders –GDP growth –Prices and interest rate –Business and consumer confidence –Labour market Potential impact of public sector cuts on the South East economy –Employment –GVA –Spatial distribution The Outlook for 2011

3. Following strong growth in November business activity stalls in December Service sector PMI in December fell for the first time in almost two years (UK) Bad weather impacts on growth, but it is not the only factor New orders also affected – some evidence of weakening domestic demand Impacts on GDP growth in Q4 Business Activity stalls in December

4. UK GDP growth revised down in Q3 and in previous quarters Annual growth still above the long run average Weakening growth in activity and new orders in Q4 impacts on GDP growth in Q4 Uncertain outlook Slower GDP growth in Q4

5. Sharper than expected increase in UK inflation – food, energy prices Inflation set to rise higher in early 2011 – VAT, transport fares, fuel, alcohol & tobacco duties Pressure intensifies on the Bank of England to increase the rate Temporary effect as CPI (exc. indirect taxes) = 2%? But Core Inflation = 2.8% Rising input prices and a gradual return of pricing power in the South East? Inflation on the increase

6. A small recovery in consumer confidence in December, but downward trend throughout much of 2010 Business confidence continues to weaken High - v. large businesses (>1,000), small (10-49), F&B Services, Manufacturing Low – micro businesses (<10), Retail & Wholesale, Construction, Transport & Storage Confidence continues to fall

7. Labour market – improving?

8. Potential impact of public sector cuts on the South East – Update (December 2010)

9. Preliminary report (August 2010) Update (December 2010) New public/private sector data New Office for Budgetary Responsibility (OBR) forecasts CSR 2010 Results also driven by the size and composition of public sector at local level Overview

10. Increase in public sector dependency Use of public administration, education & health overestimates the size of public sector across the country ‘True’ public sector employment in the South East is around 642,000 or 17% of the total Concentration largely in coastal and eastern local authorities The fastest increase in dependency on public sector jobs in the country Growth in public sector employee jobs by Local Authority (District/Unitary), Proportion of public sector employee jobs by Local Authority (District/Unitary)

11. Total Effect - Employment Lower employment effect than in August 2010 (OBR forecasts, CSR and composition of public sector in the region) Total effect in the range of 1.9% - 2.1% of all employee jobs in the region, greater in eastern counties. Indirect effect could be greater in those areas with large private sector than shown here.

12. Direct Effect - Employment Greater effect in absolute terms likely in large towns or places with significant number of public administration jobs. Looking at the share of employment more appropriate – greater potential effect along the coast and in (largely) eastern Local Authority District. Workplace based estimates – commuting could have a significant impact on some areas Potential (Direct) effect on employment, by Local Authority (District/Unitary) - Absolute Potential (Direct) effect on total employment, by Local Authority (District/Unitary) - %

13. Total Effect - GVA Lower GVA effect than in August 2010 (lower employment effect) Total effect in the range of 4.4% - 5.2% of baseline GVA in the region, greater in eastern counties. Indirect effect could be greater in those areas with large private sector than shown here.

14. The Outlook for 2011 Forecast convergence between OBR and the consensus forecast UK economy forecast to expand by around 2% in 2011 South East forecast to outstrip UK forecast but growth well below long run average Significant disparities in GVA growth within the South East projected in 2011 and beyond

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