Embargoed till 00.01 Monday 30 June 2008
UK Industrial Press Release
Two years of below-trend GDP
growth are forecast to be led by
construction, finance, professional
services, distribution and a range
of manufacturing industries
Cambridge Econometrics today releases a new version of the UK Industrial area of its Knowledge Base, which contains detailed macroeconomic and industrial forecasts to the year 2020. These forecasts are based on MDM, Cambridge Econometrics’ 41-sector model of the UK economy.
Two years of below-trend GDP growth are forecast due to weaker private
sector demand
After strong growth in 2007, GDP growth slowed in 2008Q1, driven by a
fall in investment demand. The construction and business & financial
services sectors saw the sharpest slowdowns. In spite of the resilience
displayed by consumers so far in 2008, we expect the growth in household
spending to halve in 2008, while the growth in investment spending is
forecast to slow dramatically. Overall, we expect GDP growth to slow
markedly in 2008, and remain subdued in 2009 as household and investment
demand remain weak.
Weaker household and investment spending are set to curb GDP growth in
2008 and 2009
Despite robust consumer spending so far in 2008, household confidence
has continued to weaken in the face of rising living costs and the impact
of the credit crisis on borrowing costs and the housing market. These
same factors, along with strong input price inflation, have also led
to a sharp slowdown in the construction sector. Business confidence has
also weakened due to sharp rises in input costs and the deteriorating
economic outlook. Given the current strength of inflation and weakness
of sterling, any further cuts in interest rates in 2008 seem unlikely.
Against this backdrop household spending growth is forecast to slow to
1½% in 2008 and 2009 while the growth in investment demand will
slow to 1¼% in 2009 (see chart: Final
Expenditure Components of Growth). Consequently, despite the boost given by weaker sterling to
trade, we expect UK GDP growth to slow
to just under 1¾% in 2008 and remain thereabouts in 2009.
Output in manufacturing is likely to contract later in 2008
In manufacturing, the outlook for 2008 and 2009 is not good and Motor
Vehicles, Mechanical Engineering, Non-Metallic Mineral Products and Electrical
Engineering & Instruments are among the industries expected to be
worst affected. Non-Metallic Mineral Products firms that supply the construction
industry are already suffering and are turning to their foreign operations
to boost sales. With household spending on durable goods forecast to
slow, vehicle purchases are expected to fall in 2008. In the face of
weaker activity in Construction and Motor Vehicles, and weaker demand
for capital goods, the short-term prospects for the metals industries
are poor. A pick-up in export demand and strong demand from aerospace
and defence are the two bright spots for these industries and engineering,
although some Electrical Engineering & Instruments firms are facing
increased uncertainty and reduced demand from their US export markets.
With output in manufacturing likely to contract later in 2008, total
growth is unlikely to exceed ½% in 2008 before coming to a standstill
in 2009.
Slowdowns in the consumer and business services sectors will lower output
growth in market services in 2008 and 2009
The slowdown in market services in 2008 and 2009 will be led by Professional
Services, where falling property values are having an impact on many
sub-sectors, and Other (non-professional, non-financial) Business Services,
where recruitment services related to the financial sector have been
hit. Consumer confidence is at a low ebb in the face of higher energy
and food bills, record levels of debt and economic uncertainty. The distribution
sector will suffer the effects of slower consumer spending. Retail sales
growth is forecast to slow in 2008, while pubs and motor dealers are
already suffering. The Insurance industry has been hit by reduced demand
for some products in the wake of the credit crisis. In Banking & Finance
activity will slow sharply as demand for retail banking weakens and demand
for investment banking stalls until the economy and the financial markets
recover. Output growth in market services is expected to slow to 2-2½%
in 2008 and 2009, less than half the rate of growth seen in 2007.
The key risk is a sharper slowdown in household spending, which is vulnerable
to tighter monetary policy and weaker employment prospects
Compared to the recessions of 1973-74, 1980-81 and 1990-92, which were
triggered by sharp and unexpected changes (either in the oil price, or
in fiscal and monetary policy, or both), in the present period there
has been more time for firms and households to make gradual adjustments.
The key question is how abrupt the change in household behaviour is likely
to be. In the present position, household spending growth has been much
less volatile than in the earlier periods, reflecting the long period
of low inflation and sustained GDP growth experienced since the mid-1990s,
and the chart suggests the position may be less vulnerable now. However,
the chart showing household income and
the saving ratio suggests a somewhat
less sanguine view, as the same period saw a marked fall in the saving
ratio and a corresponding increase in household indebtedness, with a
corresponding sustained boom in house prices. If households react by
seeking to reduce indebtedness rapidly the saving ratio will rise, at
the very time that real household income growth is being undermined by
the spur to inflation given by the increase in energy prices. The absence
of a policy instrument to curb inflation in asset (as opposed to consumer)
prices in the long boom of the past five years has left household spending
vulnerable to a rise in unemployment and/or higher interest rates.
Notes for Editors
Cambridge Econometrics is an independent private limited company and has been providing detailed economic and industrial forecasts since 1978. The company’s work also encompasses detailed regional and energy forecasts for the UK, and regional and sectoral forecasts for the European Union in collaboration with ERECO, the leading network of European economic institutes.
Our system of quality management for economic modelling has been approved as complying with the international standard ISO 9001:2000.
Cambridge Econometrics provides the most detailed long-term economic and industrial forecasts available for the United Kingdom. The projections are based on the ‘Cambridge model’, known as the Multisectoral Dynamic Model of the UK economy (MDM), and originally developed in the University of Cambridge Department of Applied Economics (in the ‘Growth Project’ set up in 1960 by Professor Sir Richard Stone, the 1984 Nobel Laureate in Economics, and Alan Brown). This large computerised system has approximately 5,000 endogenous variables and nearly 16,000 behavioural parameters and other coefficients. The model is continually revised and improved to take account of new data and advances in economic theory and econometric techniques.
The current version of the model, MDM (Revision 0902), has 41 industries defined according to the 2003 Standard Industrial Classification; 16 of these are services. It covers the whole of UK industry with its 41 industries and is the leading energy-environment-economy model in the UK.
The UK Industrial area of CE’s Knowledge Base is updated twice a year.
The cut-off date for the information used in the model run for this report was 20 May 2008.
Copies of the report are normally obtained by companies and government departments by subscription to the company’s industrial service at £6,105 per annum, although copies may be purchased individually for £2,270.
For further information contact:
Graham Hay
Manager, UK Industrial Service
Tel: 01223 460760
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