In this post by Adam Smith, Futures Director at GroupM, he predicts stately, rather than sensational, progress as the UK economy is recovers and investment still has lost ground to make up.
Media growth for 2013 emerged 8% up, slightly ahead of our forecast which already had plenty of topspin. We know how this happened – another big digital year, and print having a slightly less lurid one – but why is harder to put a finger on.
The Guardian's Aditya Chakrabortty put it well: 'The country is richer, but its people are poorer. This now counts as a recovery.' Real Q2 GDP is likely to exceed its Q2 2008 all-time peak, but per capita it is still 7% below: in terms of spending power, the typical household is stuck in 2005.
Companies invest when they have a reason to, but reasons have been in short supply. According to The Economist, the return on corporate capital is below its post-1997 average, and banks have cut SME lending 30% since 2007. Capital has grown expensive relative to labour, which helps explain why our employment rate is so high. Advertising has lower exit costs than fixed-capital investment: it was, therefore, logical for companies to advertise more given the prospect of reasonable, if fragile growth, in the aggregate UK economy last year, especially as fears of eurozone collapse receded.
The trouble with a high-labour, low-capital mix is how to increase productivity and thus real wealth. It is hard to know how busy all those employed hands already are. Selfemployment is at a record, which some think might indicate underemployment. If not fully occupied, then given competent management the economy has slack to grow without inflation. To judge by its reluctance to raise interest rates, even fractionally, this seems to be what the Bank of England believes (or hopes).
Higher interest rates are however just one control. The Bank has its 'macroprudential' countermeasures if housing becomes too zesty. Other, all too real, restraints on growth are fiscal drag, weak demand for our exports, and a public sector which will have to rip a lot of demand out of the economy if it is serious about reducing the structural deficit. This leaves our most promising sources of potential demand as Captain Consumer and corporate investment.
Low interest rates help consumers. Household debt is still 140% of disposable income: lower than its 170% peak, but still above the noughties norm of 100%. Consumer demand should be stable as long as inflation and the base rate remain at bay: but we need higher wages from higher productivity to grow it. This is why corporate investment is so important, creating immediate demand and future productivity. In 2013, UK fixed capital stood at 78% of its 2007 level in real terms. The ONS may be undercounting: this is a service economy with much intangible investment in people. But even with the cyclical investment recovery HSBC predicts this year, UK investment still has more lost ground to make up than the eurozone, remarkably.
The UK economy has some outstanding elements. Business and professional services are booming, bigger now than either banking or insurance; London and the south east are generating 75% of growth; and, according to the Bank of England, housing is generating a third of all new demand. But this is a highemployment, low-growth recovery. Even with investment, annual productivity improvement will struggle to return to pre-crisis trend in UK and the west generally. Progress will be stately rather than sensational, and riskily dependent on consumption. These forecasts suggest 2013 may have marked a peak in the rate of advertising recovery, but our advertising economy remains in startlingly competitive, innovative good health.
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