Dear All,
Detailed below is the Weekly News for 26th June.
Have a good week.
Gordon Polson – Director, Federation of Bakers
CBI Economic Update:
GDP: UK GDP rose strongly over the second half of 2016, with quarterly growth averaging 0.6%, surpassing most analysts’ expectations of near-flat output after the EU referendum result. However growth slowed sharply in Q1 2017, to just 0.2%. A key driver was softer consumer spending, as real wages came under pressure from rising inflation. However, other data on recent momentum are mixed: survey indicators have held up better than the official data over Q1, with our growth indicator pointing to an expansion of 0.5%. Surveys have also held up well going into Q2, implying a small pick-up in momentum.
The strength of the economy in the second half of 2016 has led to a small upgrade to our GDP growth forecast for this year (1.6%) and 2018 (1.4%), compared to November (1.3% and 1.1% respectively). However, our view of the outlook remains largely unchanged. We continue to expect less support from domestic demand, as further falls in real earnings bear down on household spending and heightened uncertainty weighs on business investment, particularly in 2018. However, our surveys indicate a little more strength in capital spending over the near-term. Furthermore, we still expect more support to growth from net trade, as a lower exchange rate and firm global growth lift UK exports and softer domestic demand bears down on imports growth.
On the whole, we expect momentum to remain tepid: over our forecast, quarterly GDP growth stands at 0.3-0.4% a quarter, around half the average since 2013 (0.6%). And our forecast remains subject to a high degree of downside risk: in particular, ongoing uncertainty over the UK’s future role in the EU could have a more adverse impact on financial markets and activity than we expect.
Inflation: CPI inflation has been picking up since late 2016, and outturns since February in particular have been substantially higher than our November forecast. While the drivers of the upside surprise have been broad-based, the most import-intensive components of the CPI basket have seen a marked pick up over this period, suggesting that the impact of previous falls in sterling is feeding through.
We expect inflation to rise further, with higher outturns pushing up our forecast, such that we now expect the CPI rate to peak at 3% towards the end of 2017 (against 2.4% previously). We expect inflation to ease a little in 2018, settling at around 2.7%—however, it will remain above the Bank of England’s 2% target for the duration of our forecast.
Monetary policy: The MPC thus far have been willing to “look through” this period of above-target inflation, judging it to be temporarily driven by the fall in sterling. However, the Bank of England’s May forecast showed they expect inflation to still be above target after the exchange rate impact wanes, even predicting it to pick up a little towards the end of their forecast period (mid-2020).
The MPC also expect the UK’s output gap to close over this period and for wage growth to pick up markedly in 2018. These judgements combined appear to be reducing the MPC’s tolerance for above-target inflation further ahead and point to a steeper path for interest rates than markets have factored in.
Minutes of the May MPC meeting showed the Committee’s language becoming more hawkish. They stressed that if the economy evolved in line with their expectations, a greater tightening in monetary policy would be necessary than that implied by financial markets (around one rate rise over the next three years). Indeed at their June meeting, three members of the Committee voted for a rise in interest rates.
As a result, we now expect a 25bp rise in interest rates in Q3 2018, with further rate rises beyond our forecast horizon likely.
Households: Household spending held up better than expected after the EU referendum, and was a key driver of the resilience in the economy over H2 2016. However momentum slowed notably in Q1 2017, with household spending rising by just 0.3%—half the average growth rate since 2013. Excluding volatility related to the later timing of Easter this year, survey indicators of consumer spending (including our own retail survey) have also been tepid in Q2 so far.
This chimes with the deterioration in real earnings, with wage growth failing to keep pace with rising inflation. We expect this theme to continue over 2017 particularly, and the ongoing squeeze on real earnings will weigh considerably on consumer spending. As a result, the economy will see less support from household spending going forward: we expect growth to slow to 1.7% in 2017 (from a strong 2.8% in 2016) and to 0.7% in 2018.
Investment: After deteriorating sharply post-referendum, our business surveys show some improvement in investment plans for the year ahead. Some of the extreme caution around capex just after the vote seems to have thawed, with anecdote from our members suggesting that minor spending projects are back on the table. Investment that was already in the pipeline prior to the referendum is also cited as still going ahead. However, uncertainty is still bearing down on bigger spending projects, particularly those with a large sunk cost.
Our survey data suggests that, in most cases, the investment pipeline lasts about a year. As a result, we expect decent quarterly growth in business investment over 2017 (averaging 0.6%). This reflects both the recent improvement in investment plans and the pre-referendum pipeline of projects feeding through.
This means that we have upgraded our business investment forecast for both 2017 (to 1.3%, from no growth in November) and 2018 (to 1.5%, from -1.2%). However, with uncertainty still bearing down on larger projects, our view on investment further out remains unchanged: we still expect quarterly growth to weaken over 2018, averaging 0.2%.
Trade: The net trade contribution to GDP growth has been volatile over H2 2016, and turned negative in Q1 2017. However recent movements have been distorted by non-monetary gold trade; excluding this and other “erratics”, volatility is less marked.
Our surveys show clearer signs of exports picking up, as the lower pound feeds through—export orders in our April manufacturing survey rose at one of the fastest rates since the mid-1990s. Global activity has also been improving, providing a supportive backdrop.
Both the lower exchange rate and improving global growth should continue to underpin exports further ahead. With softer domestic demand also weighing on imports, we expect net trade to support GDP throughout this year and 2018. However, this is masked by the large drag in Q1 pulling down our expected net trade contribution for 2017 (-0.6ppts). In 2018, net trade is expected to drive around 30% of GDP growth, marking a significant shift from the more negative contributions of the recent past.
Bank of England Agents’ Summary of Business Conditions:
- Moderate underlying growth in activity had continued overall. Annual sales growth in volume terms had continued to slow. Export volume growth had continued to increase, supported by the lower sterling exchange rate and stronger world growth.• The direct impact of the fall in sterling on cost inflation for manufacturers’ raw materials had eased, but increased costs continued to pass through supply chains into retail prices.
- Investment intentions had strengthened a little further, including investment in technology and to support increased export demand. However, heightened uncertainty remained a drag on some businesses’ willingness to invest.
Growth in retail sales values was broadly unchanged, and consumer services turnover growth continued to ease slightly. In light of the further increase in price inflation for retail goods, this suggested that annual sales growth in volume terms had continued to slow.
Business services turnover had continued to increase moderately. Contacts had reported robust growth for accountancy, legal, corporate finance and IT services.
Growth in manufacturing output had picked up, and the fall in sterling and a stronger world economy had led to a marked increase in export volume growth.
Construction output had shown continued modest growth.
Investment intentions had strengthened a little further, mostly reflecting planned investment in technology to improve efficiency. However, heightened uncertainty remained a drag on some businesses’ willingness to invest.
Bank credit availability for corporates was generally accommodative. There had been continued growth in SMEs’ and larger corporates’ use of alternative sources of funding.
Occupier demand for commercial real estate had been broadly resilient, but with some pockets of weaker activity. Investor demand growth and transaction volumes had continued to recover
Housing market activity had been subdued in most parts of the United Kingdom, as demand weakened relative to supply. The mortgage market had remained competitive among both established and new lenders.
Capacity utilisation had changed little, though there had been a small tightening in manufacturing.
Employment intentions indicated a modest increase in staffing over the coming six months. Recruitment difficulties had increased, and were moderately above normal. A survey highlighted tightened labour market conditions, in particular for key skills (see Box 2 on page 5).
Growth in labour costs per employee had remained subdued. Settlements continued to be clustered around 2% to 2.5%.
Price inflation for materials costs and imported finished goods was stable but remained elevated. Pass-through effects on material cost inflation may have passed their peak.
Manufacturing output price inflation had increased a little further, though contacts struggled to achieve full pass-through of input cost inflation. Business services price inflation had remained subdued.
Consumer goods price inflation had risen further as the fall in sterling passed through to retail prices. Consumer services price inflation had been steady.
Groceries Code Adjudicator(GCA): Figures from consecutive years of YouGov polling for the GCA demonstrate that she has had a major impact on specific issues that she has raised with the UK’s largest supermarkets, achieving improvements in fairness for suppliers. At the same time the 2017 YouGov survey published to coincide with the GCA’s Annual Conference shows for the fourth year running fewer of direct suppliers saying they had experienced one or more Code-related issues in the past year. The proportion now stands at 56% down from 62% in 2016 and from the high of 79% in 2014. Ms Tacon said: “The overall fall is welcome but the more dramatic data comes from looking at supplier experience of issues that I have identified among my Top 5 and where I have used collaborative or more formal regulatory action to drive change.” The figures show:
- Forensic auditing: 45% of suppliers reported experiencing this as an issue in 2014 but only 12% in 2017. In 2014 the Adjudicator secured a voluntary commitment from eight out of the ten regulated retailers to limit forensic audit activity to the current year plus two.
- Margin Maintenance: The Adjudicator initially raised concerns about retailers requesting lump sums to maintain margin in 2014 and her report of the investigation into Tesco made clear that any request for margin needed to be unambiguously supported by supply agreements. In 2017 only 10% of suppliers have reported this as an issue, down from 36% in 2014.
- Consumer complaints: In 2014 unjustified charges for consumer complaints was the second biggest issue with 37% of suppliers reporting it. A year later the Adjudicator published a best practice statement and monitored progress. In 2017 only 12% of suppliers have reported it as an issue.
- Packaging and design charges: Following action from the Adjudicator only 11% have reported concerns with packaging charges this year compared to 24% in 2014 and 30% in 2015.
The 2017 survey saw a large increase in the number of suppliers participating (1220), up 320% from the first poll in 2014.
For the fourth year running, Aldi topped the overall table in which suppliers rank their perception of retailers’ compliance with the Code; with Sainsbury’s as the highest placed of the big four (also for the fourth year in a row).
Delay in payments continues to be the issue of highest concern to suppliers and remains in the current category in the Adjudicator’s Top 5 along with forecasting and linked to this the issue of promotions.
The GCA annual report and accounts are available here: https://www.gov.uk/government/publications/groceries-code-adjudicator-annual-report-and-accounts-2015-2016
FDF Convention – 11 July 2017:Consumer demand for healthier options is at an all-time high, with the widest range of options on sale ever. But when the pace of change to favourite brands is too fast for consumers, nobody wins. To meet Government’s dietary goals, diets and lifestyles need to change.We will also be looking at creative solutions to obesity. With obesity rates unacceptably high in the UK, there has never been a greater need to consider innovative approaches with the potential to transform diets and lifestyles. Whether it’s developing new smart devices or social health games, applying behavioural science insights, or promoting healthier foods and drinks differently, there is more we could all be doing to help different communities.
Speakers include:
- Glenn Caton – President, Northern Europe, Mondelez International • Richard Dobbs – Director, McKinsey Global Institute • Jane Lawrie – Group Communications Director, Tesco • Hazel Harper – Programme Manager, innovate UK • Elizabeth Duggan – School Games Events Officer Active Surrey • Amanda Ursell – Dietician and journalist • Nick Henson – Senior Technical Manager, Covance • Alexia Clifford – Deputy Director of Marketing, Public Health England • Ruth Allchurch – Managing Director, Cirkle PR
The focus on public health and obesity is part of a wider agenda at the convention tackling the big issues including Brexit and Industrial Strategy.
More information and booking please see our website (https://www.fdf.org.uk/events/FDFConvention2017) or contact Elsa Ackermann on 0207 420 7149, Elsa.Ackermann@fdf.org.uk