DANIEL LEE OCTOBER 2015 BSB 2015 CONFERENCE THE CURRENT UK ECONOMIC CLIMATE FOR BUSINESS

UK RECOVERY CONTINUING IN A TRICKY GLOBAL CLIMATE

After a slow start, the UK is finally enjoying steady growth… ●But income per person has only just surpassed its level in 2007

…against a tricky global backdrop Ghost cities in China - Queues for the ATM in Greece

What does this mean for the UK? Good news - lower commodity prices

…Bad news - trade and manufacturing haven’t contributed much to the recovery Honourable exception!

UK DOMESTIC AND CONSUMER RECOVERY LOOKS MORE ROBUST

Feedback to surveys & our Trades Association Council positive in consumer-facing sectors UK consumer demand still looks strong ●“Barring any shocks, there is no reason why the consumer recovery should stall” (BRC) ●“boost from lower inflation to motorists… is clearly raiing their ability and confidence to spend” (SMMT) Transport also upbeat ●“On balance, 25% of members expect the UK economy to improve in the next six months” (BVRLA) ●“Members.. Anticipate the strong positive growth in activity levels to continue in Q3 2015” (FTA) Financial services strengthening ●“noticeable pick-up in activity in recent months” (CML) ●“definitely an increase in merger and acquisitions activity” (BIBA) Mixed feedback from export-orientated manufacturing ●“The outlook for food and drink manufacturers sounds positive” (Food & Drink Fed) ●“UK apparent demand… in the second quarter of this year has been disappointing” (UK Steel) ●“Significant weaknesses in the machinery industry for reasons that we can’t entirely explain” (MTA)

Signs of life in real wages an encouraging sign for sustainability of consumer spending growth ●Sustainable wage growth crucial now that unemployment is almost back to pre-crisis levels

But cheaper energy windfall spent on one-off purchases, while food sector recovery muted…

… and competition is intense – our surveys suggest price wars have further to go

Main risks to the consumer outlook – productivity/wages and interest rates to rise…

Key business concern: tightening labour market and skills shortages Many signs of skills shortages emerging and jobs growth slows ●“We have seen an end to the run of expansion of employment in our sector that goes back to the start of our survey in March 2011” (MTA) ●“We are therefore continuing to see employment growth within the finance sector and believe we are moving towards a period of full employment.” (Jersey Finance) ●“Pressure on drivers for many firms is acute” (RHA) ●“Skills shortages in our sector remain a threat with demand exceeding supply for key pinch-point skills.” (CECA) ●“a slowdown in employment growth in our sector is expected… Our sector needs skills that can’t necessarily be taken from the unemployment pool.” (FDF) ●“Wages increases are accelerating and there are many scarcities across the skills set for the sector.” (TechUK) ●“members reported that wages have been the key driver of inflation in the sector” (CPA) ●“Where pay reviews have been conducted in the last quarter, the resulting average (mean) increase in basic pay was 2%” (BPIF) But pay growth still restrained in many places ●“still a tendency to freeze pay for drivers, workshop staff and warehouse staff.” (FTA) ●“There has been an exit of a number of experienced people from our industry, and recruiting talented people is tough… Wage reviews without merit are a thing of the past so inflationary pay rises are modest” (BIBA) ●“For those companies still expanding and working flat out, settlements are typically 2%... several companies with continued low sales continue to offer no increase, particularly to management staff.” (BCC)

Summary: households and businesses to drive UK growth – main risks are global Slower economic growth in China weighs on other EMs & world growth Another downturn in Eurozone fortunes Uncertainty ahead of EU referendum weighs on investment Productivity recovery fades Strong recovery in productivity growth supports earnings growth

Daniel Lee Senior economist, CBI e: t: +44 (0) CONTACT US