Monthly Business Dashboard October 2011

Monthly Business Dashboard – Commentary Hampshire County Council Area

September 2017

Monthly Business Dashboard – September 2017 Hampshire County Council Area

This summary note accompanies the monthly Business Dashboard. DOTTED LINE (please see Business Dashboard) shows that Confidence (consumer and business confidence) drives the level of Business Activity (output, the volume of new orders/future output and employment in private sector). This in turn impacts on Labour Market performance and Costs/Prices, which in turn affects Confidence.

Overview

Consumer confidence perked up to some degree in August but remained heavily subdued, highlighting ongoing downside risks to consumer spending. Retail sales have continued to recover in recent months but since there is limited scope for consumers to boost their spending through either higher wages/higher borrowing or running down of assets (such as savings) there is limited scope for the strong growth in volumes. Value growth on the other hand is likely to be more buoyant as indicated by the recent strong growth in store prices.

The labour market in Hampshire and the UK remained in good shape in the three months to July. The overall picture in the labour market is little changed from recent months - quarterly employment growth was robust and stronger than reported last month but wage growth remains stubbornly weak.

Flat growth in business investment in the year to June 2017 may be partially associated with business sentiment which remains subdued by historical standards. Subdued consumer spending and flat growth in business investment is reflected in the most recent survey data on business activity (output). Business activity in the South East increased at the slowest pace in 11 months in August. Activity in the UK reached a two- month low last month. This level of business activity suggests that the pace of economic growth might have slipped to about 0.3% in the South East and 0.35% in the UK last month.

The combination of strong employment growth and slower output growth points to lower productivity growth and this is reflected in the latest official data. The most recent estimate from ONS points to falling productivity in the UK. Flat growth in business investment in the year to June 2017 is a factor that has constrained output and productivity growth. The strong growth in employment is therefore not matched by a proportionate increase in capital investment which suggests that production may become more labour intensive. This in turn exerts a downward pressure on productivity.

Prices in the economy have continued to increase. Consumer prices increased by 2.9% in August and the core inflation (inflation stripped out of the volatile components) reached a six year high of 2.7% last month. Rising import cost pressures associated with another round of sterling weakness over the summer months suggest that inflation is likely to increase further before we see a gradual fall back through 2018. Monthly growth in house prices in Hampshire was robust in July with prices on average increasing by about £2,900. Annual growth was faster than reported last month and more than twice as fast as in London or Surrey.

of 8 Relatively high inflation and subdued pay growth suggest that consumer-facing sectors are likely to continue to act as a drag on economic growth over the short-term. However, as the gap between inflation and pay growth narrows later this year and in 2018 the outlook for consumer spending and economic growth should improve.

 CONFIDENCE – the red bars indicate that Business Confidence in the South East and the UK decreased at the beginning of the third quarter. Business sentiment in the UK turned negative at the beginning of the third quarter, losing the gains made in the first half of the year. The value of the business confidence index dropped from +6.7 in Q2 2017 to -8 in Q3 2017 according to the latest ICAEW survey. 1 Similarly, the South East index decreased from +4 in Q2 2017 to -10 in Q3 2017. Business sentiment turned negative in all but one sector (energy, water & mining). Business sentiment in retail & wholesale (-23.4) and IT & communications (-4) reached the lowest level since 2009.

Business sentiment in the South East in Q3 2017 was negative and similar to the level reached following the referendum to leave the EU (red area).

Business Investment in the UK remained broadly unchanged in the second quarter after increasing in the first quarter (red bar). Provisional estimates from the Office for National Statistics (ONS) indicate that business investment remained broadly unchanged in the second quarter after increasing by 0.6% in Q1 2017. Business investment in 2016 saw two consecutive quarters of positive growth (Q2 & Q3) and two quarters of negative growth (Q1 & Q4).

Business investment in Q2 of this year was estimated to have remained broadly unchanged on the same quarter a year ago (red area).

Consumer Confidence in the UK rebounded two points in August from a twelve months low in the previous month (green bar). The UK index, a measure of a range of consumer attitudes, including forward looking expectations of the general economic situation, households’ financial position, and views on making major purchases improved two points to -10 last month. August saw a slight recovery in consumer confidence with all five measures used to calculate the index registering higher values in August compared to July according to GfK survey.

The outlook for personal finances over the next 12 months increased by three points to +5, one point higher than at the same time last year. Expectations for the general economic situation of the country over the next 12 months increased one point to -27 last month, compared to -22 in August last year. The major purchases index increased one point from -1 to 0, compared to +7 last year. Savings index (not used to calculate the overall index) was up one point to +6, twenty-one points higher than in August last year.

The overall index of consumer sentiment in the UK improved last month, nevertheless it remains negative and below the level reached at the same time last year (-7) according to the latest GfK survey (red area).

 BUSINESS ACTIVITY or Output at private sector firms in the South East increased at the slowest pace in eleven months in August. The level of business activity or output growth at private sector firms in the South East eased from 54.1 in July to 53.3 in August 1 Net balance: determined by subtracting the percentage of companies reporting decreases in a factor from the percentage of companies reporting increases.

of 8 (50.0 separates growth from contraction). Business activity in the South East last month saw a further loss of momentum as growth slowed to an 11-month low, the second slowest in England according to the latest Markit/Lloyds TSB survey of purchasing managers (PMI survey). The level of business activity in the region was above London in August. The UK index was broadly unchanged at 54.0, a two-month low. If sustained over the quarter this level activity points to 0.3% growth in business activity (output) at the private sector firms in the South East compared to about 0.35% growth in the UK.

According to the latest official estimates from ONS, retail sales volumes increased by 1% in August from 0.3% in July. Quarterly growth was 1.2% with annual growth reaching 2.4%, the 52nd consecutive month of yearly increase in retail sales). Non-food stores and non-store retailing were the key contributors to growth. All store types recorded growth in prices, with non-food stores and non-store retailing recording 3.2% and 3.3% growth respectively, the fastest pace since March 1992. Relatively strong growth in prices reflects rising inflationary pressures across the board.

Less timely official data from ONS suggests that production output was estimated to have increased by 0.3% in the three months to July compared with the three months to April. The largest quarterly contribution to the rise of production output came from mining and quarrying, due to a maintenance of oil and gas extraction facilities that usually happens in summer. Total production increased by 0.4% compared to July last year with growth mainly driven by manufacturing.

Sluggish growth in production was countered by a contraction in construction output. Construction contracted by -0.9% in July and -1.2% on the previous three months. The monthly fall was predominantly driven by a contraction in all new work (-1.4%) while quarterly decline came from both repair and maintenance and all new work.

The combination of strong employment growth and slower output growth points to lower productivity growth. The most recent estimates from ONS point a fall in labour productivity (output per hour) in the UK of about -0.5% in the first quarter of this year. The services industry saw a fall in productivity of around 0.6% while manufacturing productivity rose by 0.2% on the previous quarter. Growth in labour productivity has on average been much slower since the recession than in the decade before the recession. On this measure the performance of the UK economy has lagged G7 average and most of the economies in G7.

Flat growth in business investment in the year to June 2017 is a factor that has constrained output and productivity growth. The strong growth in employment is therefore not matched by a proportionate increase in capital investment which suggests that production may become more labour intensive. This in turn exerts a downward pressure on productivity.

 LABOUR MARKET – the amber bars indicate that the Unemployment rate on the new measure (claimant count JSA + universal credit) in the Hampshire County Council Area and the UK remained unchanged in August. The number of claimants in the Hampshire County Council Area increased by 155 additional claimants to 6,730 but the unemployment rate not adjusted for seasonal factors remained unchanged at 0.8% last month. Unemployment on this measure in Hampshire was slightly higher in August than at the same time last year.

of 8 The claimant count rate remained unchanged in all other counties in the South East last month. The claimant count unemployment rates in the Solent LEP and Enterprise m3 remained unchanged at 1.3% and 0.7% respectively.

The amber area points to an unchanged unemployment rate in Hampshire in August compared to May 2017.

As indicated by the red bar the Youth Unemployment rate (16-24 year olds) in the Hampshire County Council Area increased last month. In the UK the youth unemployment rate remained unchanged (amber bar). The number of young claimants (JSA+UC) in the Hampshire County Council Area increased by 90 additional claimants to 1,395 in August. A proxy claimant count unemployment rate (claimant count JSA + universal credit) edged higher to 1.1%.2 Youth unemployment on this measure in Hampshire was slightly higher in August than at the same time last year. The old JSA only measure of youth unemployment in Hampshire stayed unchanged at 0.3% in August.

The claimant count youth unemployment rates remained unchanged in Surrey, Buckinghamshire and West Sussex and increased in all other counties in the South East in August. The claimant count youth unemployment rates in Enterprise m3 and the Solent LEP remained unchanged at 0.7% and 1.3% respectively last month.

The red area points to a higher youth unemployment rate in Hampshire in August compared to May 2017.

As indicated by the green bars the Employment rate in the Hampshire County Council and the UK has increased in the most recent year for which data is available compared to the previous year. In the year to March 2017 compared to the previous year (year to March 2016) the number of people in employment in the Hampshire County Council area increased by about 8,200 and the rate increased by about 0.8 percentage points to 80.5%. The rise in total employment was driven by employees in employment; however faster growth was held back by a decrease in self- employment.3 The employment rate in the year to March 2017 was slightly higher than in the year to December 2016 (80%).

The size of the bar shows that at 80.5% the employment rate in Hampshire was well above the UK average (74%). The employment rate in Hampshire is at its highest rate on record for the year to March and the second highest employment rate in the South East. The green area points to a higher employment rate in Hampshire in the year to March 2017 compared to the year to March 2015.

 PRICES/COSTS – monthly growth in house prices in the Hampshire County Council Area was robust but broadly unchanged in July compared with June but annual growth was faster in July than at the same time a year ago (green bar). Monthly growth in house prices in the UK was strong in July but slower than in the previous month and annual growth remained broadly unchanged (amber bar).

Volatile monthly data shows that house prices in the Hampshire County Council Area on average increased by around 0.9% (or about £2,900) in July, unchanged from the growth

2 The unemployment rates for the young age group are not available. Our (proxy) estimates are based on the latest official population estimates for the 16-24 age group in the area. 3 For further information see Labour Market Update – Hampshire (September 2017)

of 8 registered in June. House prices in the UK on average increased by 1.1% compared to 1.5% in the previous month (revised upward from earlier estimate).

Annual growth in house prices in Hampshire rose to 6.7% in July, from 6.3% in June (revised downwards from previous estimate). The annual growth in the UK was broadly unchanged at 5.1% in July compared to June (June’s estimate was revised upwards). 4 The average price of a property in Hampshire was about £312,000 in July or about 38% above the UK average (£226,200) according to the official House Price Index. House price inflation in Hampshire was above the range where the rate is expected to be 95% of the time over the long-run (red area).

Volatile monthly data shows that house prices in Surrey and Oxfordshire decreased by -0.3% and -1% respectively in July but prices in West Sussex increased by 1.1%. Monthly change in house prices in the South East was -0.4% however the South East saw an annual growth of around 3.8% in July (slower than in the previous month). In London the average price of a property in July was around £488,700 or about 2.2 times the UK average. House prices in London on average increased by about 0.3% in July. On annual basis, growth in London eased to 2.8% in July, from 4.1% in June (revised upwards from previous estimate).

Instead of just looking at the latest increases in house prices relative to historic averages it is equally important to view house price increases in the context of several other important economic indicators. UK inflation (CPI) increased to 2.9% in August while growth in average earnings (excluding bonuses) remained broadly unchanged at 2.1% in the three months to July and below the rate of inflation. The Bank of England continues to maintain its ultra-low monetary policy, the official interest rate remains anchored at just 0.25%.

Consumer Price Inflation5 in the UK increased to 2.9% in August, from 2.6% in July (red bar).

The largest upward contribution to inflation last month came from clothing and motor fuels prices. Prices of clothing increased from 3.2% in July, to 4.6% in August. Since clothing is largely imported good the increase in prices in this area is closely associated with the sharp fall in the value of sterling. Rising motor fuel prices are also associated with a lagged response to the depreciation of sterling. A partially offsetting downward contribution was found in air fares which saw strong growth in August but the pace was slower than a year ago.

Core inflation, which strips out the volatile components such as energy, food, alcohol and tobacco components, reached a six year high of 2.7% last month. The annual rate of inflation for goods leaving the factory gate (output prices) rose for the first time in 6 months in August. Factory gate prices (output prices) increased by 3.4% on the year to August, compared to 3.2% in July, this increase was driven by petroleum products. Prices for materials and fuels (input prices) increased by 7.6% on the year to August, faster than in July (6.2%), with crude oil as the main contributor to the increase.

4 There is a time-lag between the sale of a property and the subsequent registration of this information with Land Registry. As new information becomes available, the published price indices are revised to reflect any new data. 5 From 21 March 2017, the Consumer Prices Index including owner occupier’s housing cost (CPIH) became the headline measure of inflation but the Bank of England target is still based on the CPI measure. CPIH extends the CPI to include a measure of the costs associated with owning, maintaining and living in one’s own home, known as owner occupier’s housing costs (OOH), along with Council Tax. The CPIH rate last month was 2.6%, one point percentage lower than the CPI (2.7%).

of 8 Weather disruptions in the Gulf of Mexico and geopolitical tensions may have contributed to the increase in crude oil prices.

The UK inflation has remained above the Bank of England’s 2.0% target for a sixth month in a row (red area).

Next Publication Date: 31 October 2017

of 8 The information and views set out in this note are those of the authors and do not necessarily reflect the opinion of Hampshire County Council. The Council nor any person acting on their behalf may not be held responsible for the use of the information contained therein. © Economic & Business Intelligence Service (EBIS), Hampshire County Council.