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Embargoed till 00.01 Friday 23 July 2010

UK Industrial Press Release

 

Slow growth to 2015 raises the risk that unemployment will pick up again and remain high

 

 

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.

Over 2010-11, our forecast for GDP growth is similar to that of the Office for Budget Responsibility’s (OBR) June Budget forecast: weak growth (1¼%) in 2010 followed by an improved performance (2¼%) in 2011 supported by improved trade and stronger household and business investment spending. Thereafter, however, our views diverge.

Whereas the OBR expects a sustained period of above-trend growth, in the range 2¾-3% pa over 2012-15, we expect growth to fall back to 2% pa or less as the impact of fiscal retrenchment in the UK and other countries with a substantial public sector deficit depresses domestic spending. We are less optimistic than the OBR about the prospect of an export-led recovery because austerity budget measures will be taking effect in several of our major export markets. While some recovery in household spending and business investment can be expected, once the task of repairing private sector balance sheets is completed, we do not expect this to be sufficient to produce above-trend growth at a time when government spending is being cut.

There is a risk, depicted in our forecast, that unemployment will pick up again this year and that slow growth over the following years will keep it high. Even if growth is as slow as we expect, the consequences for unemployment are uncertain because the outturn so far in this recession has been better than past experience would lead us to expect. Employers may have been more willing than in the past to try to avoid redundancies, sharing some of the cost with workers in the form of short-time working, in anticipation of recovery. Migration, which added substantially to the labour force during the boom years, may have taken a lot of the strain, as some foreign workers return home and poor job prospects discourage others from replacing them. But given what we believe to be reasonable views on a return to stronger productivity growth and some increase again in net migration, the net effect is that unemployment increases in the short term to a higher plateau, drifts a little higher up to 2015 and only begins to fall thereafter. On the claimant count measure, unemployment reaches 1.7m in 2015; on the ILO measure, unemployment exceeds 2.6m in 2015.

The following chart shows the forecast for productivity growth for the whole economy and broken down by private and public sector. Private sector productivity growth rebounds in 2010 and then drifts down to a little below the rates seen in the pre-recession period, consistent with the forecast for lower output growth. Public sector productivity growth is expected to rise, on the assumption that some of the actions taken to implement the budget cuts will result in stronger (measured) productivity growth.

The implications for net jobs creation are shown in the following chart. The importance of public sector job creation in the past decade, and especially during the recession, is clear. The chart shows the projected loss of public sector jobs over 2011-15, totalling 512,000. Although the gain in (net) private sector jobs is larger than this, at 778,000, we expect that the difference will be less than net in-migration of people of working age (running at something over 100,000 per year, down from 150,000-200,000 per year during 2004-08).

UK GDP growth in the short term is driven mainly by the rebound in manufacturing and market services.

GVA is expected to show a modest recovery in 2010 and to accelerate in 2011 thanks to rebounds in manufacturing, transport & communications and financial & business services.

Manufacturing output is expected to grow by 3½% in 2010. With the uncertainty prompted by the fiscal austerity measures in the UK and abroad and rising unemployment, consumer demand is expected to remain weak in 2010 and exports will be hit by weak demand in the euro-zone and the recent appreciation of sterling against the euro. The recovery in manufacturing is forecast to decelerate further in 2011, as household spending growth will remain weak in the face of fiscal retrenchment and job market uncertainty, and exports growth will be relatively weak as a result of fragile demand in the euro-zone and other major UK trading partners.

In market services, growth in 2010 will be driven by distribution and retailing, although growth in these sectors will not be robust and subject to significant downside risks due to weak household spending. In 2011, output growth is forecast to accelerate to 3½% led by financial & business services.

Recovery in construction is expected to lag behind that in other sectors, as public infrastructure spending is cut. Moreover, the reluctance of banks to take on risk continues to blight the short to medium term prospects of the construction industry by restricting private investment projects.

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Notes for Editors

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.

Cambridge Econometrics is an independent private limited company and is owned by a charity, the Cambridge Econometrics Trust for the Promotion of New Thinking in Economics. It has been providing detailed economic and industrial forecasts since 1978, and its system of quality management for economic modelling has been approved as complying with ISO 9001:2000. Our company also provides detailed regional and energy forecasts for the UK, and regional and sectoral forecasts for the European Union.

We provide the most detailed long-term economic and industrial forecasts available for the UK. 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 5752), 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 forecast uses chained volume measures with reference year 2005.

The cut-off date for the information used in the model run for this report was 30 June 2010.

Access to our updates is normally obtained by companies and government departments by subscription to the company's industrial service at £6,540 per annum. The UK Industrial area of CE's Knowledge Base is updated twice a year.

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For further information contact:

Richard Lewney
Managing Director

Graham Hay
Manager, UK Industrial Service

Email: info@camecon.com
Tel: 01223 533100