Ivan PerkovicHead 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

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

• 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

35

40

45

50

55

60

65

35

40

45

50

55

60

65

Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec

2008 2009 2010

Business Activity (output)

South East

UK

Source: Markit PMI 2011

50 = no change

35

40

45

50

55

60

65

35

40

45

50

55

60

65

Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec

2008 2009 2010

FA

LL

ING

RIS

ING

50 = no change

New Orders

South East

UK

Source: Markit PMI 2011

• 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

-8

-6

-4

-2

0

2

4

-8

-6

-4

-2

0

2

4

III IV I II III IV I II III IV I II III

2007 2008 2009 2010

UK GDP Growth to 2010Q3

Quarterly

Annual

Source: ONS 201135

40

45

50

55

60

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

I II III IV I II III IV I II III IV I II III IV I II III IV

2006 2007 2008 2009 2010

UK GDP

South East PMI

UK PMI

PM

I O

utp

ut

Ind

ex

(qu

art

erl

y a

vera

ge

)

GD

P g

row

th (%

cha

ng

e, Q

/Q)

Business Activity and UK GDP

Source: Markit PMI 2011 and ONS 2011

Q4?

• 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

-2

-1

0

1

2

3

4

5

6

-2

-1

0

1

2

3

4

5

6

Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec

2008 2009 2010

% ch

an

ge

on

a ye

ar e

arlie

r

Source: ONS 2011

RPI

CPI

UK Inflation

BoE Target

44

48

52

56

60

64

68

72

76

44

48

52

56

60

64

68

72

76

Mar May Aug Nov Feb May Aug Nov Feb May Aug Nov

2008 2009 2010

Prices (South East)

FA

LLIN

G

R

ISIN

G

input prices

charges

recession

Source: Markit PMI 2011

• 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

40

50

60

70

80

90

100

110

120

40

50

60

70

80

90

100

110

120

May 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010

Source: Nationwide 2011

UK Index

Consumer Confidence Index

recession

-50

-40

-30

-20

-10

0

10

20

30

40

-50

-40

-30

-20

-10

0

10

20

30

40

I II III IV I II III IV I II III IV I II III IV I II III IV

2006 2007 2008 2009 2010

South East

UK

Business Confidence

Source: ICAEW 2011

recession

Labour market – improving?

74.0

74.5

75.0

75.5

76.0

76.5

77.0

77.5

78.0

4.50

4.75

5.00

5.25

5.50

5.75

6.00

6.25

6.50

Sep-Nov 2008 Mar-May Sep-Nov Mar-May 2010 Sep-Nov

Employment (LHS)

Unemployment (RHS)

Labour Market - South East England

Source: ONS 2011

empl

oym

ent r

ate

(%)

ILO unem

ployment rate (%

)

2

3

4

5

6

7

8

9

10

11

2

3

4

5

6

7

8

9

10

11

II III IV I II III

2009 2010

Redundancy Rates 2009Q2 - 2010Q3

Re

du

nd

an

cies p

er 1

,00

0 e

mp

loye

esSouth East

UK

Source: ONS 2011

36

40

44

48

52

56

36

40

44

48

52

56

Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec

2008 2009 2010

FA

LLIN

G

R

ISIN

G

Employment

South East

UK

Source: Markit PMI 2011

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

• 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

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)

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.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Aug 2010*

directindirect

Dec 2010*

Source: SEEDA 2010 estimate

* asumes lower average employment multiplier (1.45)

A. Employment Effect

% o

f em

ploy

ee jo

bs in

the

Sou

th E

ast

1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 2.6

Buckinghamshire

Berkshire

Surrey

West Sussex

SOUTH EAST

Oxfordshire

Hampshire

East Sussex

Kent

% of total employee jobshighlow

Source: SEEDA 2010 estimate (national estimate constrained to OBR November 2010 forecast)

B. Total Effect (low-high employment multiplier)

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) - %

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.

3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5

Buckinghamshire

Berkshire

Surrey

West Sussex

SOUTH EAST

Oxfordshire

Hampshire

East Sussex

Kent

% of baseline GVA (2010)

low high

Source: SEEDA 2010 estimate (national estimate constrained to OBR November 2010 forecast)

B. Total Effect (low-high multiplier)

0

1

2

3

4

5

6

August 2010* December 2010*

directindirect

% o

f ba

selin

e G

VA

in t

he S

outh

Eas

t

* asumes lower average employment multiplier (1.45)

Source: SEEDA 2010 estimate

A. GVA Effect

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

-2

-1

0

1

2

3

4

September 2010

max

min

consensus forecast

OBR (June-10)

January 2011

consensus forecast

OBR (Nov-10)

max

min

Source: HMT 2011 and OBR 2010

GDP Growth in 2011 (UK)

annu

al %

cha

nge

A B1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8

Buckinghamshire

Berkshire

Surrey

West Sussex

SOUTH EAST

Kent

Hampshire

Oxfordshire

UNITED KINGDOM

East Sussex annual % change

Source: Experian RPS, December 2010

GDP Growth in 2011 (South East)

Thank you

SEEDA Research & Economics

Email: research@seeda.co.uk

www: http://www.seeda.co.uk/what-we-do/economic-intelligence-and-research