july 2014 the cornish account

The Cornish AccountBack in the Black?

www.francisclark.co.uk


Welcome Introduction

The Cornish Account

Presentation at Francis Clark2 July 2014

Stephen Collins

AgentAgency for South West England

GDP and sectoral output

South West Agency

OUTPUT AND EMPLOYMENT

South West Agency

Contributions to the change inwhole-economy employment since 2008 Q2

Source: Labour Force Survey. South West Agency

Self-employment share

Source: Labour Force Survey South West Agency

Regional unemployment rates

Source: Labour Force Survey.South West Agency

Survey indicators of capacity utilisation

Sources: Bank of England, BCC, CBI, CBI/PwC, ONS and Bank calculations.South West Agency

Productivity growth

Sources: ONS and Bank calculations.South West Agency

DEMAND

South West Agency

Contributions to average quarterly GDP growth

South West Agency

Household saving ratio

South West Agency

Survey measures of household expectations

Source: Research carried out by GfK NOP on behalf of the European Commission. South West Agency

Business investment and surveys of investment intentions

Sources: Bank of England, BCC, CBI, CBI/PwC, ONS and Bank calculations.. South West Agency

Composition of the fiscal consolidation

Source: Institute for Fiscal Studies. South West Agency

The UK current account

South West Agency

UK goods and services exports

South West Agency

UK imports and import-weighted demand

Sources: ONS and Bank calculations. South West Agency

Sterling exchange rates

South West Agency

Advanced economies continued to recoverContributions to growth in real world GDP, actual and forecast

Sources: IMF World Economic Outlook (WEO) and Bank calculations. South West Agency

GDP projection based on market interest rate expectations and £375 billion purchased assets

South West Agency

INFLATION

South West Agency

Bank staff projection for near-term CPI inflation

South West Agency

Contributions to CPI inflation

South West Agency

Private sector nominal earnings and output per worker

Sources: ONS and Bank calculations. South West Agency

Estimate of consumer-facing companies’ margins relative to its average since 2000

Sources: ONS and Bank calculations South West Agency

Companies’ expected changes in own prices over the next year

Sources: CBI (all rights reserved) and ONS. South West Agency

CPI inflation projection based on market interest rate expectations and £375 billion purchased assets

CPI inflation projection in February based on market interest rate expectations and £375 billion purchased assets

South West Agency

CREDIT CONDITIONS

South West Agency

Loans to individuals

South West Agency

Projections and outturns for net lending to households and PNFCs

South West Agency

At short horizons, implied volatility was historically low across asset classes

Differences from averages since 2003, in standard deviations, of three-month option-implied volatilities

Sources: Barclays Live, Bloomberg, Chicago Mercantile Exchange, NYSE Liffe and Bank calculations.

South West Agency

House price inflation has risen in the United KingdomAnnual Halifax and Nationwide regional house price inflation

Sources: Halifax, Nationwide and Bank calculations. South West Agency

House price inflation has increased in all areas of the United Kingdom during the past year

Annual house price inflation

Sources: Halifax, Nationwide and Bank calculations. South West Agency

Mortgage rates remained at exceptionally low levelsAverage UK mortgage rates on new lending

Source: Bank of England.South West Agency

The share of new mortgages with LTI multiples above 4.5 has risen to a new peak

New mortgages advanced for house purchase by LTI

Sources: Council of Mortgage Lenders, FCA Product Sales Data (PSD) and Bank calculations.

South West Agency

Indicators of housing affordability

Sources: Bank of England, Halifax, Nationwide, ONS and Bank calculations. South West Agency

Headwinds

• Financial sector continues to heal

• Public and private balance sheets continue to be repaired

• Exporters face a 10% appreciation in the value of sterling over the past year

• Growth in the world economy, although improving, remains muted

• EA risks more balanced but downside risks o/a rapid growth in Chinese shadow banking

• Risk of reassessment of risks in financial markets – implied volatilities are low

South West Agency

POLICY

South West Agency

Decision-making bodies, since April 2013

South West Agency

Bank Rate and forward market interest rates

Sources: Bank of England and Bloomberg. South West Agency

Medium term monetary policy

• Meet inflation target, while using up spare capacity, particularly in the labour market

• Bank Rate increases are expected to be gradual and limited, so Bank Rate may need to stay low for some time

• Asset purchase sales (ie, reversal of QE) will be deferred till Bank Rate is at a level from which it could be cut materially

• Close coordination with the FPC

South West Agency

Slack in the economy

• Companies operating at about normal levels of capacity, but significant slack in the labour market

• Best collective judgement: =1-1.5% of GDP

• Visible in • unemployment rate above equilibrium• level of part-time working among people unable to find

full time work• “hidden slack” in high level of self-employment?

• Expectation: only absorbed by the end of the forecast period, assuming output growth moderates and productivity growth resumes

South West Agency

Policy measures announced by the Financial Policy Committee, 26 June 2014

• First, we are introducing a new affordability test: mortgage lenders should assess whether borrowers could still afford their mortgage if Bank Rate were to be 3 percentage points higher than at the origination of the loan.

• Second, we are introducing a cap: no more than 15% of any lender’s total number of new residential mortgages should be at or greater than 4.5 times the borrower’s income.

South West Agency



What we have seen

• Cornish economy perhaps slower to feel the cold in certain key areas

• Lack of large employers and higher than average self-employment

• But heavy reliance on Public sector for higher paid jobs



What we have seen

• Construction hit hard due to finance availability and market conditions

• Cornish house prices peaked at £208,000 April 2008 but fell to a low of £175,000 May 2009

• Business start-ups exceed failures 2004-2008, however 2008-2011 more failures than start-ups



What is the most significant factor restricting your business?

1) Economy/Market Demand (40%)

2) Recruitment/Skills (21%)

3) Availability of Finance (17%)



Recruitment/Skills


Video 1


Video 2


Video 3


Video 4


Our survey - Employment/Wages

Do you expect to increase you employee numbers in the next 12 months?

• 50% expect static numbers, encouragingly however, more expect growth (45%) than decline (only 5%)

• Investing/training for current staff


Our survey - Employment/Wages

What are your expectations for salary inflation in 2014? • Static - 36%• Up to 2% rise - 35%• 2-4% rise - 28%• Over 4% rise - 1%• Pay cuts - 0%

Cornwall continues to be well below National average, but who sets the wages?

Pensions/Auto-enrolment – All additional costs that need to be recovered

No indication of wages inflation in the near future to close the gap.

Impact on ability to get on the housing ladder?



Availability/Sources of Finance


Video 5


Video 6


Video 7


Our survey - Investment

Will you be looking to raise additional borrowing or funding in the next 12 months?• 52%Yes• 48% No



Retained Profits

Bank loan/Overdraft

Grant /Public funding

Crowdfunding

Other

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Which source of borrowing do you expect to seek to provide additional funding?



What will additional funding be for?

• 34% - Equipment (Tax driven?)

• 21% - Working capital

Less apparent appetite for

• 8% - R&D

• 3% - Business acquisition


Economic Threats

Interest Rates - The only way is up!


Video 8


Economic Threats

Impact on National/Cornish Economy

• Households

• Business

• Politics? General Election 2015

• Potential Opportunities – Will savings rates follow interest rates? Retired and shoulder months


Video 9


Economic Threats

• Interest Rates - A blunt tool?

• One size does not fit all!


Economic Threats

What do you think is the most serious economic issue for Cornwall?

Same old story, nothing new here!


Video 10


Economic Threats

1. Transportation links/costs • Road/Rail/Air• Local Public transport• Isles of Scilly


Video 11


Economic Threats

2. Housing (affordable) • Differential between house prices and wages• Impact of Second Homes?• Housing Boom?


Opportunities

Where is the greatest opportunity for Cornwall in the next 10 years?


Video 12


Opportunities

1) Energy and Renewables2) R&D sector3) IT & Related industries

4) Marine5) Agriculture6) Tourism

New/Sexy! Jobs?

Old/Established and forgotten at our peril


Video 13


Opportunities

Brand Cornwall - Quality

Third tranche of EU funding to 2020• Cornwall and Isles of Scilly LEP• Need to build on Objective One and Convergence funding• Where administered from?



Is your business Back in the Black?

Overall positive signs at individual business level

• 51% - Back in the black

• 25% - “never went into recession”

• 17% - Still in red but expectations of improvement

• 6% - Still in recession



Do you think Cornwall is Back in the Black? • Yes 33%• No 67%

Inconsistency with individual business responses?

Everyone above average?

Glass half empty?



Conclusion



With thanks to all who took part in the round table discussion and our survey.

Kim Conchie Cornwall Chamber of CommerceColin Stratton St Austell BreweryJeremy Miller Miller and Son SW LLPAndrew Brewer FG Brewer & Sons LimitedPhilip Strong Reflex Marine LimitedClare Mock Hardy Carpets LimitedDavid Brian County ConfectioneryChris Hugo Watergate Bay HotelTim Light Cornwall Ferries Limited


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july 2014 the cornish account

Economy & Finance

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demand south west agency

employment south west

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individuals south west

ratio south west agency

south west england

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