doncaster economic review q2 2010
DESCRIPTION
Doncaster Chamber's quartely economic review of the local economy. Q2 2010TRANSCRIPT
Q2 2010Economic Review Doncaster Chamber
Toward a Profitable, Productive Doncaster
2
The second quarter of 2010 has seen further improvements in growth; the Chamber expects the ONS to revise the national GDP growth up to 0.4%-0.6%, after manufacturing figures proved buoyant in the three months to July, no doubt reflecting the continued weakness of sterling.
However, as the economy moves from recession to recovery, there is little evidence to suggest that growth will improve beyond 1% in the next 12 months. In light of businesses expectations of falling turnover, worsening cash flow and reduced profitability, any suggestion that the recovery is assured should be considered misleading.
Doncaster’s headline unemployment rate remains far less than the national average at 5.6% (the worklessness – a figure which includes those out of work due to incapacity benefit remains high). However, businesses are exercising caution where recruitment is concerned, as they expect to advertise 10% fewer vacancies over the next quarter. Thus far, the labour market has demonstrated a degree of strength, by keeping more workers in employment than comparable recessions of the last century. While the effect of public sector budget cuts will inevitably have a negative impact upon this, the Chamber expects unemployment to peak at 2.65 – 2.75 million in 2010.
21% of businesses are reporting price rises in the coming quarter, down from 24% in the previous quarter, but still high given the level of spare capacity in the economy. This, once again, highlights the significance of the stubbornly high rate of inflation. 91% of all businesses will, at the very least, be maintaining the price of their products over the next three months. 17% of businesses reported pressure from the high cost of raw materials, up from 14% in the previous quarter. The Chamber is concerned that the low pound is increasing the cost of importing raw materials from the continent – thus negating the effect of the low pound on exports.
Business confidence, the profitability expectation, now sits at 29%, a 6% reduction from the first quarter of 2010, converging with national averages whereas previously Doncaster had been running ahead. Some comfort however can be derived from the fact that Doncaster businesses are reporting a 16% improvement in the town as a place to do
business compared with twelve months ago. Nonetheless, business remains cautious over prospects for the remainder of 2010, particularly in light of the austerity measures announced in the emergency budget. Business is still too reliant on the public sector stimulus introduced at the height of the recession; the £6bn of cuts announced for this fiscal year are most unwelcome.
The recent growth forecasts from the independent Office of Budget Responsibility reveal the extent of the gamble taken by the coalition Government in the recent Budget. Unless the significant spare capacity in the economy can suppress inflation sufficiently in the coming months, the 2.5% increase in VAT scheduled for January 2011 could see inflation pushed higher and force the Bank of England to raise interest rates – further damaging GDP growth prospects that have already been downgraded due to public sector spending cuts. However, the Chamber must applaud the ambition of the coalition Government in pushing this budget through a House of Commons in which no single party has an overall majority. This parliamentary term will define prosperity for the next generation. Measures introduced now have the potential to restore growth and reduce debt within five years; the Chamber remains cautious, however, over the timing of these measures, in light of the fragility of the economy in the short-term and it’ vulnerability to events in the EU.
Doncaster Economic ReviewSummary “24% of Doncaster firms will be recruitingin the next quarter” Daniel Fell, Head of Policy
Doncaster At A Glance
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Training InvestmentPlant Investment
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Doncaster Economic ReviewContents
Summary P2 Contents P3 About Doncaster Chamber P4 Overview P5
Gross Domestic Product Consumer Confidence Business Confidence Employment Housing Inward Investment Miscellaneous
Sector Breakdown P12
Manufacturing Services
Budget 2010 P14 Key Dates for the Next Quarter P16 Useful References P17 About the Quarterly Economic Survey P18 Press Release P19
4
The Voice of Doncaster Business Doncaster Chamber is “the voice of Doncaster business”, the Chamber has a membership base of some 1,200 local businesses who collectively employ some 47,000 people in the Borough. The Chamber’s aim is to help create a profitable, productive Doncaster for the benefit of businesses and residents alike, and works to achieve this by proactively addressing the issues that affect the success of the local economy. The Chamber believes that Doncaster is a great town but wants to make it an even better place for local companies and investors alike to do business. Businesses typically join the Chamber because they want to create and access more commercial opportunities. The Chamber can facilitate this, by helping businesses raise their profile and by brokering new business contacts through events and networking. There are, however, many other barriers to further business growth, such as access to procurement opportunities, difficulties in the transport system or skills shortages in the local area. The Chamber’s role is to identify such issues and work with key stakeholders and partners to remove them, thus engendering a more favourable business climate in the Borough. In order for the Chamber to accurately reflect business opinion, the Chamber delivers a range of Focus Groups which are open to all Chamber members. These groups offer an excellent forum for Doncaster businesses to address the issues, concerns and opportunities pertinent to them, as well as offering the opportunity to network and share best practice. The Chamber offers groups in sectors such as Construction, Professional Services, Transport and Logistics, Retail, and Creative and Digital Industries. The Chamber also runs a Knowledge and Enterprise Focus Group which addresses skills issues, and an Employment and Training Focus Group to tackle HR related issues. Each Focus Group is represented at the Chamber’s Policy Council, whose task is to set the direction of policy work at the Chamber.
This level of engagement with local businesses, combined with regular research, such as this publication, ensures that the Chamber can talk with authority on issues affecting local business and can represent business when working with partner organisations. The Chamber is committed to working with local stakeholders to deliver the Borough’s Economic Strategy for the benefit of the town’s businesses and communities alike. To this end the Chamber publishes a Policy Manifesto each year to outline local business priorities and to identify ways in which Doncaster’s economic regeneration can continue apace. The Policy Manifesto details the key issues affecting business, under four key themes of Business Climate, Business Skills, Business Infrastructure, and Business Opportunities, and suggests a suitable course of action in each case. A full copy of the Policy Manifesto is available via the Chamber’s website. Doncaster faces some serious challenges in the coming years. The town has a productivity gap of some £830m; meaning that Doncaster adds £830m less value to the economy each year than it should for a town of its size. Work is well underway to tackle this headline issue by a number of key organisations, including Doncaster MBC. Nonetheless, the town still has a number of challenges relating to education, health, housing, transport and other issues that must be met if Doncaster is nurture a profitable, productive business climate. This economic review has been developed in order to provide businesses and partners across the Borough with a detailed, accurate, economic assessment of Doncaster – the foundation with which to deliver on the recommendations of the Chamber’s Policy Manifesto and Doncaster’s Economic Strategy alike. If you have any questions regarding the content of this review, or would like more information regarding the benefits of Chamber Membership, please contact the Chamber on 01302 341000 or at [email protected].
Doncaster Economic ReviewAbout Doncaster Chamber“The Chamber’s aim is to help create a profitable, productive Doncaster” Nigel Brewster, President Howard Gannaway, Chief Executive
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Success Doncaster Business Starts (last 12 months)
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Sales (Last Quarter) - Doncaster - All Sectors
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Doncaster - All Sectors
The first part of 2010 has seen weak growth, in line with the national expectation of a 0.4% rise in UK GDP. While long term growth prospects remain strong, short-term economic policy must appreciate current fragility. Gross Value Added (GVA) Doncaster’s GVA is £4.442bn, accounting for 5.3% of the total GVA for Yorkshire and the Humber and giving Doncaster the 6th largest economy in the region. GVA per head in the Borough is £15,179 per annum, only slightly behind the Yorkshire and Humber average of £15,941. Business Stock There are currently 7,650 registered businesses in the Borough.
Employment Size Band 0 - 4 5 - 9 10 - 19 20 + Total 5,795 975 460 420 7,650
The number of new businesses created (through Success Doncaster) in the Borough fell slightly in the last quarter to 94, from 98 in the three months to March 2010.
Public Sector GVA Contribution The public sector accounted for 27.6% of Doncaster’s GVA in the last financial year. This makes the Borough particularly vulnerable to the Government spending cuts proposed by the coalition. 59% of Doncaster businesses are deeply concerned by the impact this is likely to have on their efforts to grow in the coming years; a sizeable proportion of private sector turnover in Doncaster is, at present, still reliant on the public sector – we must remember that the economy is not long out of recession and has yet to see GDP growth of anything over 0.4% - the economic recovery is barely underway. Sales The last quarter saw an 8% increase in the number of firms reporting increased sales – a reverse in the decline witnessed since the turn of the year. This would seem to suggest that the recovery is starting to take hold. The number of firms reporting increases in advanced orders also rose by 2%; this is encouraging but the modest numbers still reflect the level of caution still present in businesses over the future of the economy.
Overview Gross Domestic Product “27.6% of the Borough’s GVA is accounted for by the pubic sector.”
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Prices - Doncaster - All Sectors
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Gross Household Disposable Income - Doncaster
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The headline in the coalition’s recent emergency budget was a VAT increase to 20%. The Chamber had argued that this rise must not be implemented until at least April 2011, as stubbornly high inflation and increasing prices pressures are, at present, negating the impact of excess capacity in the economy. Gross Disposable Household Income (GDHI) Household’s disposable income rose rapidly between 2000 and 2008, reflecting growth in the economy and in house prices, as households borrowed against their property to fund consumption. The onset of recession in 2008 did little to adjust this trend; however, the cost of food, fuel and higher taxes, particularly VAT, will see GHDI fall over 2010 – particularly in those households with lower incomes. It is likely that Northern economies, those with high levels of public sector employment, will be hit hardest. In Doncaster 54% of employees work in the public sector. Inflation Inflation fell for the first time in 2010 last month, with the headline rate now at 3.4%, from the April high of 3.7%.
Fuel Prices The average cost of a litre of unleaded petrol in Doncaster is 116.2p – against a national average of 118.3p.
The average cost of a litre of diesel in Doncaster is 119.2p – against a national average of 120.9p.
Prices 21% of businesses are reporting price rises in the coming quarter, down from 24% in the previous quarter, but this is still high given the level of spare capacity in the economy. This, once again, highlights the significance of the stubbornly high rate of inflation. 91% of all businesses will, at the very least, be maintaining the price of their products over the next three months. Price Pressures 17% of businesses reported pressure from the high cost of raw materials, up from 14% in the previous quarter. The Chamber is concerned that the low pound is increasing the cost of importing raw materials from the continent, thus negating the effect of the low pound on exports. 11% of businesses reported pressure from the cost of finance – a continuation of the lower trends in this figure seen recently. 16% of businesses are reporting pressure from the cost of pay settlements, 8% higher than the last quarter – and possibly a sign of a second wave of job cuts; this is particularly the case in the public sector, where pay settlements are higher than in industry.
Overview
“38% of businesses are concerned about the stubbornly high rate of inflation”
Consumer Confidence
7
Business Confidence (Next Three Months) - All Sectors
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Cash Flow (Last Three Months) - All Sectors
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Doncaster - All Sectors
Business confidence in Doncaster has fallen consistently since the turn of the year. Businesses are now concerned of the threat of a secondary recession, in light of the announcements in the recent budget. Profitability Business confidence, the profitability expectation, now sits at 29%, a 6% reduction from the first quarter of 2010, converging with national averages. Business remains cautious over prospects for the remainder of 2010, particularly in light of the austerity measures announced in the emergency budget. Business is still too reliant on the public sector stimulus introduced at the height of the recession; the £6bn of cuts announced for this fiscal year are most unwelcome. Turnover The percentage of businesses reporting overall growth has fallen dramatically to 37%, an incredible 18% reduction on the previous quarter, further demonstrating business concerns of a double-dip recession can be evidenced.
Cash Flow The number of businesses reporting an imporovement/worsing in cash flow now sits at a balance of +1. This is a key indicator with which to measure the state of the economy. During the recession, cash flow fell
dramatically to a balance -54% in the final quarter of 2008 and has yet to fully recover; a further illustration of the damage that could be caused to Doncaster’s economy by the introduction of public spending cuts in 2010.
Investment Business has reported a 21% fall in investment in plant/machinery and a 24% fall in training provision. While this reduction is understandable, the obvious concern would be for the effect of such cuts on future competitiveness. The Chamber is deeply concerned that this might well be business leader’s reflection on the perceived state of the economy, with a heightened chance of a secondary recession, or indeed simply that they expect price pressures to remain high in the medium term, making investment inefficient. There are also concerns that, with investment in machinery and equipment falling rapidly, the new Government’s decision to reduce investment incentives for high-end manufacturers as part of the corporation tax reform, are looking increasingly ill-founded. ________________________________________________ Flexibility Asked whether their goods or services would change over the next twelve months, 51% of businesses said there would be no change 42% said there would be some change and 7% said there business would change significantly.
Business ConfidenceOverview
“Business confidence now sits at 29%, a 6% reduction from the first quarter of 2010”
8
Doncaster Residents Registered Unemployed (2010)
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Employment Expectations (Next Three Months) - All Sectors
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Doncaster - All Sectors
Doncaster’s headline unemployment rate remains far lower than the national average at 5.6%. However, businesses are exercising caution where recruitment is concerned, as they expect to advertise 10% fewer vacancies over the next quarter compared to Q1 ’10. Unemployment Unemployment in the Borough fell for the third month in succession during May. There were 9,966 registered as unemployed in May 2010, as apposed to the 10,274 registered as unemployed in May 2009. The headline unemployment rate in Doncaster is currently 5.6%, compared to May 09 at 5.8%. Crucially, this compares well to the national average of 7.9% in the UK.
Employment Rate As at September 2009 (most recent stats available) there were 123,800 people in employment in Doncaster, giving an Employment Rate of 68.2%, compared to Yorkshire and Humber at 71.2.% and Great Britain at 72.9%.
Redundancies The fiscal year 2009/10 saw a total of 927 redundancies reported to Job Centre Plus. Since April 2010, 417 redundancies have been reported to Job Centre Plus the Borough.
Vacancies In May 2010 Job Centre Plus handled a total of 2071 vacancies, compared to 1,360 in the same period last year – an overall increase of 56%.
Employment Expectations Employment expectations in the Borough have fallen since the last quarter. 22% of businesses interviewed expect to recruit over the next three months, while 11% expect their workforce to decrease in the next three months.
Overview Employment “Unemployment in the Borough fell for the third month in succession in May”
9
Over-inflated house prices in the UK pose a strong underlying threat to long-term economic growth. The last decade has seen a housing shortfall develop, as the number of households created in any one year has far exceeded the levels of new homes completed. This gap has significantly worsened over the course of the recession, thus intensifying the risk to the economy, something that has, thus far, seems to have gone unnoticed by key decision makers in Whitehall.
House Prices House prices have been remarkably resilient during the course of the recession; indeed, eleven of the last twelve months have seen house price rises. The average cost of a home in Doncaster now stands at £121,674, some 9.8% higher than in May 2009. As confidence has crept back into the market, incentivised in part, by low interest rates, we have seen a small rise in transactions that has proved enough to produce an upward bounce in prices; largely because it coincided with very low levels of supply on the market. his lack of supply is, however, indicative of a wider problem.
Housing Completions The assumptions of the Department of Communities and Local Government suggest that new households are projected to increase by, on average, 252,000 each year between now and 2031 across the UK. If this proves to be the case, the current levels of housing construction have fallen far below future levels of household formation. In last financial year, only 314 houses were completed in Doncaster.
Social Housing Social housing waiting lists have also rocketed by 55% over the last five years; rising unemployment and repossessions as a result of the recession are projected to cause the number of households on waiting lists to jump from 1.77m in 2008 to a record high of around two million in 2011 – a rise of some 200,000 homes in just three years across the UK. In Doncaster alone, the current social housing waiting list has 12,959 applicants.
Overpriced
The IMF recently calculated the share of the increase in real house prices in the UK over the last ten years that cannot be accounted for by fundamental factors such as lower interest rates and rising incomes. This “house-price gap” suggests that prices are about 30% higher than can be justified by fundamentals.
Incentivise Developers Various measures have been enforced by local and national Governments in order to assist first-time buyers and those on low incomes that seek the stability of home-ownership. One such measure is a requirement for a percentage of new build homes to be affordable homes – in Doncaster, 26% of all new homes (on sites with 15+ units) are required to be affordable. There are also housing requirements, forcing local authorities to build a certain number of homes in every year (1280 in Doncaster). These two requirements are, however, counterintuitive, as developers looking to build new estates are dissuaded from doing so, when the affordable home requirement reduces or eliminates their margins on the build. Hence, not only are developers failing to keep abreast with current demand (thus maintaining prices merely at current ‘inflated’ levels), but they are now actively discouraged from developing in some instances by, ironically, measures bought in place to combat excessive house prices. There is a real risk of prices spiraling out of control.
The only conceivable way to avoid this eventuality, is to build significant numbers of new homes, in order to, initially, meet current demand based on household creation projections – thus shielding prices from supply pressures – and then move beyond this to satisfy the existing shortfall, in order to reduce house prices and make homes more affordable for all.
Ministers must recognise that house prices should become a key aspect of fiscal policy in the UK.
“In the last financial year, only314 houses were built in Doncaster.”
Overview Housing
10
Jobs Created Through Inward Investment
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Inward Investment is critical to the future of Doncaster’s economy. Whilst there is a strong case for re-balancing the economy towards exporting, it is also important that quality businesses are brought in to the town to generate wealth and provide employment. Doncaster’s infrastructure makes it an attractive location for investors, as do low labour costs. In recent years companies such as BT, LA Fitness and Kinch Aviation have recognised that Doncaster is a good place to do business. Amazon, the online retailer, have announced that they will be re-locating to a distribution centre in Doncaster to cover extra demand over the Christmas period – a clear indication that significant national and international players are recognising Doncaster as a good place to do business. Jobs Created During 2009, inward investment in Doncaster created some 418 jobs, up slightly on the previous years 366. Since 2000, 20,980 jobs have been created in the Borough as a result of inward investment. Value to Economy During 2009, inward investment contributed over £48 million to the value of the Doncaster economy, slightly down on last years £50m+. Since 2000, over £1.5bn has been added to the economy from inward investment.
Land During 2009, inward investment in Doncaster was responsible for the development of 468 acres – this accounts for 38% of the 1,232 acres developed since 2000 and is the highest single figure since 2000, possibly reflecting the cost reductions forced by the recession.
Overview Inward Investment
“Over the course of 2009, inward investment in Doncastercreated some 418 jobs”
11
Export Sales (Last Quarter) - Doncaster - All Sectors
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Capacity - Doncaster - All Sectors
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Value of Exports
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As the economy moves from recession to recovery, it is important that public sector stimulus is replaced by private sector growth. Much of that growth should come from exporting goods and services abroad. Exports have continued to rise this quarter, in line with expectations given the weak pound. However, the rate of growth of exports has again slowed, thus suggesting a plateau in the reaction to the weak pound. Capacity The percentage of firms reporting excess capacity has risen over the last quarter by 18% to 82%. This reverses the trend seen over the last year, whereby capacity has been gradually reduced as firms shed employees. Given the high levels of inflation the economy is witnessing at present, the Chamber is hopeful that this excess capacity will translate into a reduction in inflation prior to the VAT increase in January 2011. Export The percentage of firms reporting increasing export sales fell in the last quarter by 9% to 15%, possibly indicating a plateau in the reaction to the weak pound, and confirming the expectations of the previous quarter. Again, there is a predicted reduction in growth for the next quarter, of a further 5%. The Chamber is concerned that the weak pound, while reducing the cost to export, is putting pressure on the
price of importing raw materials from the continent, thus negating the benefit of exporting in the first place. The number of exporters and number of transactions has increased in comparison to the first quarter of 2009, by 17% and 26% respectively. The range of destinations exported to has also increased by 18%. This suggests that the weak pound is, in fact, encouraging more export activity – this quarter represents a marked improvement on previous indices. The value of these exports is an incredible 117% higher than the second quarter of 2009; the significant contributing factor to this, being the 575% increase in the value of exports in June 10 compared with June 09. This represents a benefit to the Doncaster economy of over £9million.
Overview Miscellaneous “The percentage of firms reporting excess capacity has risen over the last quarter by 18%”
12
Profitability Expectations (Next Quarter) - Manufacturing
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Cashflow (Last Three Months) - Manufacturing
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Manufacturing Sector (Donc) Manufacturing Sector (SY)Manufacturing Sector (UK)
Doncaster’s Economic Strategy identifies that Doncaster is not currently recognised as an innovative economy. Whilst other towns and cities perform less well than Doncaster there is still evidently work to be done. Profitability Business confidence, the profitability expectation, now sits at 39%, a further 12% increase on the previous quarter and still comfortably higher than national averages in manufacturing. Cash Flow Manufacturers’ cash flow improved significantly in the last quarter, with the balance of businesses reporting an improved position rising by 21% to +4%. This is extremely encouraging as it represents a solidification of the recovery underway in the sector. Investment in plant/machinery remains low however, thus raising serious questions about the coalition Government’s intention to remove tax incentives for high-end investment; a decision that will stifle growth in the sector. While Chancellor George Osbourne suggested that changes to the investment allowance under Corporation Tax would only affect 5% of businesses, that 5% represents high-end technology industries, who are most likely to invest £100,000 in machinery and equipment.
Sector BreakdownManufacturing
“Manufacturers’ cash flowimproved significantly in thelast quarter”
Manufacturing Comment “The last two years has brought almost universal agreement that we urgently need to rebalance the UK’s economy back towards manufacturing and towards exporting. In South Yorkshire we have seen an increase in the number of businesses stating that they are operating at capacity; this is good news for order books, but more worrying in terms in prices and competing with international competition. “It is also interesting to note that local manufacturing businesses are still reporting challenges in relation to recruitment and skills. Despite the current jobs market, local businesses are still reporting key skills gaps, for example the unmet demand for language skills that will help facilitate export activity. More has to be done to supply the UK’s manufacturers with the staff they need to grow the sector if South Yorkshire and UK manufacturers are to compete globally; in an era of 25% departmental cuts it is more important than ever for manufacturers to tell the education sector what they need.
Dan Fell, Head of Policy, Doncaster Chamber
13
Profitability Expectations (Next Quarter) - Service Sector
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Cash Flow (Last Three Months) - Service Sector
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Service Sector (Donc) Service Sector (SY) Service Sector (UK)
The economy’s over-reliance on the services sector is something the coalition Government is keen to tackle. Given the evident fragility of the sector at present, and the consequences this might have for economic growth, this ambition would seem to be prudent. Profitability Business confidence, the profitability expectation, now sits at 26%, an 11% reduction on the previous quarter for the sector. Cash Flow Cash flow in the service sector remained weak, falling again by 3% this quarter. This is reflected in the significant drop in investment in training, disappointingly down 22% on the previous quarter. Turnover has also fallen by 23% from the first quarter of the year. These figures illustrate the effect of stagnant growth and serve to highlight the risk of recession in an economy over-reliant upon services to generate growth. Of concern to the new Government should be the fact that the services sector will be the hardest hit by public sector cuts. Given the evident fragility in the sector, the Chamber questions the timing of the national budget cuts.
“The evident fragility of theservices sector calls intoquestion the timing of nationalbudget cuts”
Services Comment
“Anecdotally a number of Chamber members in the services sector are reporting that things are picking up, however our survey findings this quarter really contradict that. The adage that people are doing twice as much for perhaps half the return still seems to be ringing true. Similarly, confident business forecasts beyond the next few months remain hard to come by as uncertainty grips the economy. “Quantitative Easing has freed up the banks’ balance sheets and the claim that they are ‘open for business’ is starting to ring true as the comparatively low number of businesses reporting problems when accessing finances demonstrates. Locally, it is commendable that bankers have bucked national trends and put their heads above the parapets to attend local meetings and events over the last year – the Pro Doncaster Q&A event being notable evidence of this. However, even in this context, it is noteworthy that in recent months we have seen them out and about all the more.
Dan Fell, Head of Policy, Doncaster Chamber
Sector BreakdownServices
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The Emergency Budget set out a five-year plan to re-build the British economy. For the first time, the Government’s fiscal policy decisions have been based upon independent forecasts for the economy and public finances. The fiscal mandate that frames all policy decisions taken is an ambition to achieve a current balance by the end of this Parliament. This is supplemented by an ambition to see public sector net debt falling as a percentage of GDP by the end of this Parliament.
Budget Deficit The enduring theme of the emergency budget has been the determination to restore Britain’s fiscal credibility in the eyes of the World. The coalition’s ambition to turn a record budget deficit into a budget surplus within five years is admirable. The two-year freeze in public sector pay is prudent; 35% of Doncaster businesses are still struggling to recruit skilled staff – it is important that the private sector can compete on even terms; many private sector employees have seen no inflationary increase in pay since 2007. However, the real-terms cuts to departmental budgets of a record 25% across the board are troubling. 59% of Doncaster businesses are deeply concerned by the impact this is likely to have on their efforts to grow in the coming years; a sizeable proportion of private sector turnover in Doncaster is, at present, still reliant on the public sector – we must remember that the economy is not long out of recession and has yet to see GDP growth of anything over 0.4% - the economic recovery is barely underway.
VAT The widely expected 2.5% increase in value-added tax was the headline announcement of this budget. The Chamber has long argued against such a rise, in light of high inflation (3.4% in May) and falling disposable incomes which, along with high food and fuel costs, has left many families, particularly those on low incomes, struggling to survive. Worse still, there is a good chance that the increase in VAT will push inflation higher still, forcing the Bank of England to raise interest rates and thus, reduce economic growth. The Chamber has lobbied for a delay in the introduction of the
rise, to allow excessive capacity in the economy to drag inflation lower, but does not feel that the proposed January introduction allows enough time for this to happen. This quarter’s Doncaster Economic Review does, however, reveal an increase in spare capacity in the economy (by some 18%) which, it is hoped, will blunt some of the effect of the VAT rise.
Capital Gains Tax Capital Gains Tax will remain at 18% for low and middle-income earners, but taxpayers on higher income tax rates will now pay this at a rate of 28%. The Chamber strongly welcomes the extension of the 10% rate for entrepreneurs from the first £2m of qualifying gains to the first £5m.
Corporation Tax This budget announces a reduction in the main rate of corporation tax from 28% to 24% over the course of four financial years from April 2011, a reduction in the small profits rate to 20% from April 2011 and a reduction in the main and special rate of capital allowances to 18% and 8% respectively in April 2012. This will give the UK the lowest rate in the G7 and fifth lowest in the G20. The Chamber strongly believes that inward investment should be encouraged in this manner and is delighted that the coalition Government recognises the competitive advantage such a move offers. The reduction in the annual investment allowance from £100,000 to £25,000 per year is, however, unwelcome, as despite the Government’s insistence that 95% of businesses will still have their annual investment covered, we believe that such a move disadvantages the manufacturing sector. Concern must be raised over the nature of the businesses now excluded from this allowance – particularly in light of the coalition’s intention to see economic growth led by high-end manufacturing and exporting – for whom £25,000+ of annual investment is not uncommon. The Chamber also welcomes the intention to establish a business forum, chaired by the Exchequer Secretary to the Treasury, that will consult with multinational businesses on the UK’s tax competitiveness, including the long-term aims of reform of the corporate tax system. We also awaits the autumn review on reform, particularly in light of the Government’s belief that, in general, a broad tax base,
“The ambition to turn a record budget deficit into a surplus within five years is admirable”
Doncaster Economic Review - Quarter 2 2010Budget 2010
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a low rate and a more territorial approach will improve competitiveness and provide greater certainty for business.
Regional Growth Fund The Government will enable locally-elected leaders, working with business, to lead local economic development. As part of this change, Regional Development Agencies will be abolished. Yorkshire Forward, as the region’s development agency, has been extremely successful at targeting support to those areas that need it. Yorkshire and Humber as a region has seen a lack of investment in many areas compared with other regions for decades – great steps have been taken by Yorkshire Forward towards reducing such funding disparities. The region also has a strong voice and strong brand in Whitehall thanks to Yorkshire Forward and business was keen to see this continue. In this light, we await details of a scheme to help new businesses in targeted areas of the UK that need it most. During a three year qualifying period, new businesses which start up in these areas will get a substantial reduction in their employer National Insurance Contributions. Opportunity Missed Over-inflated house prices in the UK pose a strong underlying threat to long-term economic growth. The last decade has seen a housing shortfall develop, as the number of households created in any one year has far exceeded the levels of new homes completed. This gap has significantly worsened over the course of the recession, thus intensifying the risk to the economy, something that has still yet to dawn on key decision makers in Whitehall. Ministers must recognise that house prices should become a key aspect of fiscal policy in the UK; if prices were to be stabilised at an affordable level, that protects long-term investment growth, while avoiding an inflationary ‘bubble’, this would go some way toward regulating the excessive levels of consumer debt that have become commonplace in the last decade and that fuelled the last recession.
To achieve this, the Chamber has lobbied the Government to commit to build significant numbers of new homes, in order to shield prices from supply pressures and then gradually reduce house prices, making homes more affordable for all. The coalition’s budget document fails to even recognise the matter as an area of concern. Weaker Growth Forecasts The independent Office of Budget Responsibility has forecast weaker growth prospects in light of the actions taken in the budget. This reflects measures which restrain Government spending and real household disposable income and will, as a result, hold back consumer demand. In 2010, GDP is forecast to rise by 1.2 per cent followed by 2.3 per cent in 2011 (against 1.3 per cent and 2.6 per cent in the pre-Budget forecast). From 2012 onwards, GDP growth projections suggest a recovery, as prices and wages adjust and monetary policy continues to support demand. This assumption is troubling, as the Chamber feels that the VAT rise could force the Bank of England to raise interest rates – thus suppressing some of this expected growth. When compared with the pre-Budget forecast, growth is stronger from 2013 onwards as the economy adjusts back towards potential output. By the end of the forecast, the adjustment is not yet complete, so that the output gap is slightly larger in 2014 than it was in the pre-Budget forecast. Gamble The growth forecasts from the independent Office of Budget Responsibility reveal the extent of the gamble taken by the coalition Government. Unless the significant spare capacity in the economy can suppress inflation sufficiently in the coming months, the 2.5% increase in VAT scheduled for January 2011 could see inflation pushed higher and force the Bank of England to raise interest rates – further damaging GDP growth prospects that have already been downgraded due to public sector spending cuts. The Chamber remains cautious of the timing of the budget measures, in light of the fragility of the economy in the short-term and it’s vulnerability to events in the EU.
“The coalition’s budget document fails to recognise house prices as an area of concern.”
Doncaster Economic Review - Quarter 2 2010Budget 2010
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“Investment with a long-term benefit, such as that in infrastructure, must be safeguarded from cuts” Daniel Fell, Head of Policy
Doncaster Economic Review - Quarter 2 2010Key dates for the next quarter
Bank of England Credit Conditions Survey 01/07/10 Bank of England MPC Announcement 08/07/10 Bank of England Inflation Report 13/07/10 Bank of England MPC Announcement 05/08/10 Bank of England Inflation Report 11/08/10 Bank of England MPC Announcement 09/09/10 Bank of England Quarterly Report 20/09/10
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Success Doncaster Success Doncaster is a programme run by Doncaster Council, working collaboratively with the public, private, voluntary and community sector across the Borough. It is the brand name for Doncaster Council’s Work Skills and Enterprise Programme and this investment offers our businesses, communities and individuals support to develop their employment, skills and entrepreneurial potential. A diverse range of specialist providers have been contracted by the Council, to deliver bespoke initiatives tailored to the needs of residents and employers. Visit: www.successdoncaster.co.uk to find out more. Invest in Doncaster Invest in Doncaster is the first point of contact for investors. Our team of specialists provides information to both existing and potential businesses on a wide range of issues including the availability of land and premises, business development, financial benefits, HR consultancy, and information on the local economy. Visit: www.investindoncaster.co.uk to find out more. Business Link Business Link helps your business save time and money by giving you instant access to clear, simple, and trustworthy information. Whether you're starting up, already running a business, or looking to grow and develop, we can help you to:
manage your finances employ people find and keep customers pay the correct tax comply with environmental legislation understand regulations in your sector find events and support near you
Visit: www.businesslink.gov.uk to find out more.
SYITC (South Yorkshire International Trade Centre) The SYITC is a partnership of Barnsley & Rotherham, Doncaster and Sheffield Chambers of Commerce, delivering international trade services throughout the South Yorkshire region. Visit: www.syitc.com to find out more JobCentre Plus JobCentre Plus is an executive agency of the Department for Work and Pensions. It provides services that support people of working age from welfare into work and helps employers to fill their vacancies. Visit: www.jobcentreplus.gov.uk to find out more.
“Doncaster Chamber is ‘the voice’ of Doncaster business”
Doncaster Economic ReviewUseful References
National Data Sources:
ONS – Office of National Statistics
UK TRADE
PUBLIC SECTOR
NOMIS – Official Labour Market Statistics
HM Treasury
Bank of England
INFLATION REPORT
MPC MINUTES
QUANTITATIVE EASING EXPLAINED
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The Quarterly Economic Survey (QES) is the UK’s largest private quarterly survey of business. Each quarter, over 5,600 businesses – belonging to Chambers of Commerce in every region of the country – participate in the QES. Businesses are questioned on a wide range of issues, including home sales and orders, export sales and orders, employment prospects, investment, recruitment difficulties, cash-flow, confidence and price pressures. The QES is the first economic indicator of the quarter, published in advance of official figures and other private surveys, and it consistently mirrors actual trends in the economy; for this reason the survey is closely watched by policymakers at the Treasury and Bank of England and also by the media.
Locally, the survey is distributed, via post and email to all businesses in Chamber membership. We can expect a typical response rate of 250 businesses – 20% of all Chamber members – making this research the most credible economic indicator available to Doncaster.
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Local, Regional and National Comparisons
Business Confidence (Profitability Expectations)
-60%
-40%
-20%
0%
20%
40%
60%
80%
Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10
Quarter
Bal
ance
Doncaster Yorkshire and the Humber UK
“The Quarterly Economic Survey is the largest and most representative independent business survey of its kind in the UK”
Doncaster Economic ReviewAbout the Quarterly Economic Survey
National Headlines this quarter: Results from the Quarter 2 2010 British Chambers of Commerce Economic Survey, suggest that the UK economy saw further growth in the second quarter of 2010, building on the improvement in the first three months of the year. The economic data, collected from over 5,600 businesses across every region of the country, is released just two days ahead of the Monetary Policy Committee’s July interest rate decision. • Manufacturing home sales surged by 29 points in
Q2, to +30%; a level not seen since the last quarter of 2007. The service sector’s domestic sales rose 6 points, to +12%.
• Employment in manufacturing saw a big
improvement in Q2, rising 35 points to +19%. Manufacturing employment expectations also increased by 16 points, to +14%. Employment in services edged up by just 1 point, to +4%, while employment expectations rose 3 points, to +11%.
• One of the most worrying aspects of this quarter’s
results is the pressure manufacturing firms are facing to increase prices, driven by the cost of raw materials. The balance of manufacturers reporting pressure to raise their prices surged 22 points in Q2, to +30%, which is the highest figure this survey has seen since Q3 2008.
• Manufacturing’s cash flow improved by 10 points,
to +1%. Services cash flow improved 6 points, but remains negative at -3%.
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Tuesday, 6 July 2010 BUSINESS WARY OF PUBLIC SECTOR CUTS AND NERVOUS ABOUT ECONOMIC PROSPECTS
A report released today by Doncaster Chamber of
Commerce, highlights the challenges facing the economy
during the remainder of 2010
Doncaster Chamber’s “Doncaster Economic Review” details
data collected during the second quarter of the year and
reveals a worrying 18pc fall in turnover and an 8pc reduction
in businesses cash-flow positions. Indeed businesses
expectations of profitability for the remainder of the year
have also fallen by some 6pc.
59pc of Doncaster businesses rate Government spending
cuts as the single largest threat to their business and are
deeply concerned of the effects of an ill-timed withdrawal of
public sector stimulus.
Commenting, Daniel Fell, Head of Policy at Doncaster
Chamber, said:
“The Chamber applauds the ambition of the coalition
Government in pushing the emergency budget through a
House of Commons in which no single party has an overall
majority. The measures proposed have the potential to
restore growth and reduce debt within five years.
“The Chamber remains cautious, however, over the timing of
these measures, in light of the fragility of the national
economy in the short-term, its vulnerability to events in the
EU and, closer to home, Doncaster’s continuing reliance on
the public sector.
“There has been a real mixed bag of results this quarter;
whist there is some positive news, for example, the rise in
the value of exports and falling unemployment, most of the
key indicators are pointing to uncertain times for Doncaster
and the risk of a ‘double dip’; particularly in the North of
England, remains significant. It is therefore important that
public sector spending cuts do not disproportionately affect
the business community and that investment in key areas,
such as infrastructure, is protected.”
Doncaster Economic Review - Quarter 2 2010Press Release “59% of Doncaster businesses cite public sector spending cuts as the single biggest threat to their business.” Daniel Fell, Head of Policy
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