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Interactive Toolkit

Understand your Vital Signs

Use this interactive tool to create your bespoke dashboard

  • STEP 1 Select up to two sectors from the list below
  • STEP 2 Choose the indicators and drivers that affect performance in your chosen sector
  • STEP 3 View your Vital Signs dashboard

If you have any questions regarding the Vital Signs dashboard please contact us.

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MANUFACTURING

VITAL SIGNS

The UK manufacturing sector is having an encouraging start to 2012

Overview

The UK manufacturing sector is having an encouraging start to 2012. The ongoing weakness of sterling compared with before the recession will continue to make British exports relatively price competitive. The eurozone sovereign debt crisis remains the biggest threat to the manufacturing sector, given that over half of the UK’s goods exports are sold to the European Union. We expect business failures in the manufacturing sector in 2012 to be roughly the same as in 2011, but to fall thereafter as the economic recovery gains a stronger foothold. However, a severe recession on the Continent would seriously undermine the ability of exporters to grow.

Indicators

Index of Manufacturing: Growth of 1.6% expected this year

The Office for National Statistics index of manufacturing shows that output in the manufacturing sector grew by 2.1% in 2011, following growth of 3.7% in 2010. Despite growth in 2010 and 2011, output in the manufacturing sector is still some 4.4% below 2008 levels, as economic recovery has failed to completely offset the negative effects of the recession. Cebr’s central forecast is for manufacturing sector output growth of 1.6% this year.

Manufacturing PMI: Slow, positive growth in manufacturing

The Markit / Chartered Institute of Purchasing and Supply (CIPS) Purchasing Managers’ Index (PMI) for the UK manufacturing sector scored 51.2 in February, where a reading of above 50.0 indicates growth. While this is marginally down from a January reading of 52.0, it is the third consecutive month in which the Index has remained at or above the 50.0 mark, pointing toward slow positive growth in the sector.

Drivers

International economic outlook: eurozone looks set to enter recession

The outlook for the global economy has weakened over the past year, as the sovereign debt crisis in the eurozone risks triggering another financial crisis. Cebr expect the eurozone economy to enter recession and contract by 0.6% this year, which will bear down on demand for UK manufacturing exports.

However, growth opportunities in other parts of the global economy remain. For example, Cebr expect the Chinese economy to grow by 7.6% this year, while the Indian economy is expected to grow by 6.0%. Manufacturers exporting to fast growing emerging markets should have strong potential for robust export growth.

Exchange rates: Sterling to remain weak

Sterling is expected to remain much weaker than before the recession over the coming years, with the dollar: sterling exchange rate averaging $1.67 per pound and the euro: sterling exchange rate averaging €1.25 per pound between 2012 and 2016. This compares with 2007 averages of $2.00 per pound and €1.46 per pound. The relative weakness of sterling should make UK exports relatively more price competitive than before the recession, supporting goods export growth over the coming quarters. This ought to aid the manufacturing sector.

Export growth: Modest growth supported by weak sterling

Exports volumes grew by 4.8% in 2011, following growth of 7.4% in 2010. However, Cebr expect export growth to slow to just 0.8% this year, as recession in the eurozone curbs demand for exports. Going forward, a pick-up in global economic growth, combined with the continued weakness of sterling, ought to support export growth of close to 4.0% over the years 2013-2016. This should support growth in the manufacturing sector.

UK GDP growth: Sluggish growth in the short-term

UK GDP growth is likely to remain sluggish in the short-to-medium term, as fiscal austerity and weak consumer demand bear down on the overall pace of recovery. This will curb domestic demand for manufactured goods in the UK, meaning the outlook for manufacturers relying on domestic demand is likely to be weaker than the outlook for export-oriented manufacturers.

Input prices: Input price inflation likely to fall this year, though rising oil prices remain a risk

Input price inflation remains high, though shows signs of moderating. In the year to January 2012, input prices in the UK rose by 7.0%, down from a rise of 8.9% in the year to December 2011. This is the lowest annual rate since November 2009, when the index rose by 3.9%. We expect input price inflation to continue falling throughout this year, as global economic growth slows. This should reduce cost pressures on manufacturers. However, with the price of oil remaining high and political tensions in the Middle East threatening to push up prices still further, there are upside risks to input price growth which manufacturers need to be aware of.

Business investment: Likely to grow sluggishly

Business investment grew by just 0.2% in 2011 and growth is likely to remain sluggish in the short-term as business sentiment remains weak and concerns about growth prospects remain. This is likely to lead to weak domestic demand for manufactured goods in the short-term.

Sector talking points

  • Education system: Manufacturers continue to struggle with recruiting skilled staff, and are calling for the Government to further develop the apprenticeship scheme, resolve “significant issues” with the engineering diploma and also change how STEM skills are taught in skills. The manufacturing industry faces a massive talent gap as many skilled staff reach retirement – and have little prospect of refilling the roles.
  • Jobs and talent: The situations with Bombardier and Kraft do seem to have been a wake-up call for the Government, with Cable flying out to NY this week to plea with GM to spare more than 2,000 jobs at its Ellesmere Vauxhall factory. However, with huge cuts on the horizon at BAE and AstraZeneca’s UK manufacturing operations, there is clearly more work to be done to ensure jobs stay in the UK.
  • Bringing manufacturing back to the UK: Manufacturers are now reviewing their decisions to take manufacturing abroad, with a many businesses now “onshoring” their operations back to the UK. A combination of rising labour costs in formerly cheap countries, rising transportation costs, worries about IP and a surge in demand for a “Made in Britain” label are all reasons for manufacturers re-exploring their home countries.
  • SMEs are struggling with a lack of funds to grow: SMEs are still finding they are unable to readily access cash from banks in order to grow – and are finding banks are still failing to understand the long term investment needs of manufacturers. Banks continue to pay lipservice to manufacturers, promising they will change their strategies. The CBI, however, is calling for more drastic measures and is proposing is for medium-sized businesses to issue bonds as a way of raising funds. Individual investors could then use their annual tax-free ISA allowance of £10,680 to buy them. It also wants the Government to more readily provide information to small businesses on alternative ways of raising finance.
  • Exporting is the key to growth: Many businesses – particularly larger ones – are finding they key to stall falling domestic revenues is to increase exports, particularly to fast growth BRIC and CIVETS economies. However, many small businesses remain reluctant to take the plunge (normally due to a fear of failure) and need additional handholding from the government in order to help them take advantage of export opportunities.
  • Motor manufacturing is helping to buoy industry growth: The news this week from Nissan adds further weight to the success in the past year of the British motoring industry. The export success of other manufacturers (such as Jaguar Land Rover) are also helping to rejuvenate an industry which many were concerned had already peaked.

Other relevant information

Manufacturing Outlook

Video case study: Chinese Lessons

Manufacturing industry issues

Manufacturing LinkedIn Discussion Group

Contacts

Tom Lawton Head of Manufacturing

Phil Emmerson Partner

Other contacts

Retail and Wholesale

Vital Signs

The sector accounts for the largest proportion of UK output

Overview

Barely a week goes by without more dire predictions in the press about the prospects for this sector, but a closer look reveals that as well as challenges, there are opportunities.

While total UK retail sales values barely beat inflation in 2011, internet sales leapt an impressive 22%. For every struggling Peacocks there appears to be a thriving Burberry and the ‘squeezed middle’ still appears to have enough in their pockets to reward those who respond to the more sophisticated consumer. Generally retailers face a bleak trading environment and retail failures, already projected to be higher in 2011 than 2010, are not expected to peak before 2013. However a look at the talking points section below reveals some of the opportunities for retailers in the UK.

Indicators

Retail sales: A mixed picture. Online retail continues to shine.

Last year, households saw a 1.6% decline in real disposable incomes and this resulted in a 0.8% decline in consumer spending. This year, household incomes are likely to be effectively flat, which will squeeze consumer spending power. From 2013 onwards, real household income growth is likely to pick up as earnings growth recovers and increases in Income Tax free personal allowances boost take home pay.

Drivers

Unemployment: Unemployment rate set to rise to 9.0% by the end of the year

Unemployment in the UK is expected to rise over the coming months, with the unemployment rate rising to 9.0% in the last quarter of 2012, up from 8.4% in the last quarter of 2011. This will constrain growth in consumer spending in the short term by bearing down on household spending power.

Consumer confidence: Remains firms in negative territory.

Consumer confidence remains fragile – the GfK index of consumer confidence stood at minus 29 in January 2012. Although this is up 4 points from December it is still disappointing, being worse than most of the monthly figures in the first half of 2011. Despite this 4 point improvement, which was partially a result of falling CPI inflation, consumers remain deeply worried due to rising unemployment and spillovers from the Eurozone sovereign debt crisis. This is likely to constrain consumer spending this year.

Consumer credit: Growth still much more modest than before the recession.

Consumer credit conditions are likely to remain tight in the short-term, meaning that only modest growth in consumer credit is likely. Consumer credit grew at a relatively slow rate of 1.9% in 2011. This compares with the period 2000-2007, when consumer credit grew at an average annual rate of 12.4%. Relatively weak consumer credit growth compared with before the recession will curb consumer expenditure and thus bear down on retail sales in the short-term.

Interest rates: Base rate on hold throughout 2012.

The Bank of England base rate is expected to remain on hold throughout 2012, which should keep other interest rates relatively low too. This should support consumer spending in the economy, though the positive effect of low interest rates is being partially offset by tight credit conditions.

Sector talking points

  • Review store portfolio and increase multichannel investment
  • Review leases and renegotiate terms with landlords
  • Adjust pricing and promotions to increase the perception of value for money
  • Improve product availability of fast moving SKUs
  • Be wary of overstocking
  • Consider overseas franchising options.

Other relevant information

High Street Sales Tracker

Video Case Study

The Changing Face of Retail

What does the Budget 2012 mean for retailers?

Contacts

Don Williams Head of Retail and Wholesale

Tony Nygate Partner

Other contacts

Real Estate and Construction

Vital Signs

The UK Real Estate sector continues to face a challenging outlook in 2012

Overview

The UK Real Estate and Construction sector continues to face a challenging outlook in 2012. The level of business failures in this sector is expected to increase by 14% from 2011-2012. Housing market fragility and reduced public sector demand will continue to exert downward pressure on the sector.

Indicators

Construction sector PMI: Latest data better than expected

The Markit/CIPS construction sector purchasing managers’ index stood at 54.3 in February, up from 51.4 January and the highest reading since March 2011. Any figure above 50 points towards expansion in the sector. The February data was better than most analysts had been expecting, suggesting that while the outlook for the construction sector remains difficult, a complete economic collapse in the sector is unlikely.

Drivers

House prices: Average growth of 0.8% this year

Average UK house prices fell by 1.3% in 2011, but we expect house price growth to resume in 2012 as transactions pick up. A modest 0.8% rise in house prices is expected this year. Between 2013 and 2016, house price growth is expected to pick up and average 2.8% per year, as the economic recovery gains a stronger foothold and the ongoing shortage of housing supply relative to demand props up prices. This ought to support growth in the residential property sector.

Government investment: Fiscal austerity will hit construction firms

Government investment is expected to contract sharply in the short-term, which will hit many businesses in the construction sector hard. Government investment is expected to fall by 9.4% this year and by a further 4.2% in 2013.

Mortgage availability and mortgage transactions: A gradual increase in lending over the coming years

Mortgage lending fell sharply during the credit crunch of 2008-9, and has been anaemic since. Gross mortgage lending in 2011 remained 59% lower than the 2007 total. Cebr expect the number of mortgage approvals to grow by 2.7% in 2012, as property transaction growth begins to slowly recover.

Input prices

Input price inflation remains high, though shows signs of moderating. In the year to January 2012, input prices in the UK rose by 7.0%, down from a rise of 8.9% in the year to December 2011. This is the lowest annual rate since November 2009, when the index rose by 3.9%. We expect input price inflation to continue falling throughout this year, as global economic growth slows. This should reduce cost pressures on the sector. However, with the price of oil remaining high and tensions in the Middle East threatening to push up prices still further, there are upside risks to input price growth.

Talking Points

Construction

  • Its not all about new build. Invest in long-term relationships to deliver essential front-line maintenance and enhancement services - a market which is worth £22 billion per annum and reaches 24 million people across the UK.
  • Think of sustainability as a competitive advantage rather than a business cost. Clients and lead contractors are increasingly looking for their supply chain to match their own sustainability standards.
  • Working capital management: review your processes to help deliver cash, cost and service benefits. Improve internal cost controls; don’t overlook enterprise zone and development credits and have robust claims management processes in place.
  • Don’t be a victim of corruption in construction. In a tight market fraud increases – make sure your staff understand the Bribery Act, that there is a robust risk assessment process in place, you have done your due diligence on the supply chain and you know the red flags to watch for.

Real Estate

  • With many occupiers under pressure, particularly across retail and leisure sectors, landlords need to be innovative about lease agreements, flexible rent commitments and shorter lease renewals.
  • Outside prime locations, property owners should seriously consider alternative uses for vacant commercial property. Diversify away from the more traditional asset classes of office, industrial, retail into niche growth markets such as healthcare, data centres, self storage and student accommodation.
  • Investigate any opportunities to buy distressed assets but ensure you don’t overpay – good secondary could end up outperforming prime if you have a strong asset in a secondary location but its critical to do your due diligence.
  • Understand the end-user to stay one step ahead. As retail customers get more sophisticated understand their needs, show innovation and insight into what space consumers want and where. How will technology impact the future needs for office space with flexible working, sustainability, cloud technology etc?
  • Joint venturing is becoming increasingly popular to get deals done and those prepared to share are more likely to seize opportunities.
  • Gone are the days of simple debt lending - those prepared to enter into complex financial structures using alternative sources of funding e.g. mezzanine debt, private equity etc are more likely to get deals done.

Other relevant information

Corruption in Construction

Affordable Housing Funding Survey

Real Estate recovery portal

Real Estate Networking Forum on LinkedIn

What does the Budget 2012 mean for Real Estate?

Contacts

Solly Benaim Head of Real Estate and Construction

Sarah Rayment Partner

Other contacts

Technology, Media, Telecoms

Vital Signs

TMT is the sector most clearly bucking the trend

Overview

As technology becomes more and more vital to success in all industries, TMT is the sector most clearly bucking the trend. Strong demand for digital solutions – for everything from cloud computing to super fast 4G and mobile platforms – is creating a climate of investment and growth. Failures in the technology, media and telecommunications sector are expected to fall over the coming years. Cebr predicts that domestic high-tech firms will be a major driver of economic growth going forward.

Indicators

Software investment: Grew by nearly 2% in 2011

Computer software investment in the UK grew by 1.9% in 2011, following solid growth of 11.4% in 2011. Growth over the past two years has more than compensated for the decline in investment seen during the recession of 2008/09, meaning that software investment last year stood at an all time high.

Business confidence: While weak overall, tech-firms seem to shine

While business sentiment in general remains weak, firms in the TMT sector appear to be relatively upbeat. The ICAEW Business Confidence monitor shows that IT & Communications was one of only two sectors to record positive confidence in Q1 2012. Similarly, the Federation of Small Businesses Voice of Small Business Index shows “computer and related services” firms more confident than average. Overall, this suggests that economic prospects for firms in the TMT sector are better than average in the short-to-medium term.

Drivers

GDP: Sluggish growth in the short-term

UK GDP growth is likely to remain sluggish in the short-to-medium term, as fiscal austerity and weak consumer demand bear down on the overall pace of recovery. This will curb domestic demand for TMT goods and services in the UK.

Business investment: Weak in the short-term. IT investment expected to be a major driver going forward.

Business investment grew by just 0.2% in 2011 and growth is likely to remain sluggish in the short-term as overall business sentiment remains weak and concerns about growth prospects remain. This is likely to curb domestic demand for TMT goods and services in the short-term. However, annual business investment growth is expected to pick up to around 3% between 2013 and 2016, with much of this likely to be in IT, where the range of possible applications is continually growing and where productivity enhancing investment is likely to be necessary to improve UK business competiveness against emerging market economies.

Sector talking points

  • Review your foreign strategy: For TMT businesses who sell physical goods, the opportunities for export shouldn’t be ignored. For businesses who already export, a review of current export markets should be considered: with the continuing sovereign debt crisis in the Eurozone and growth even in the “fast growth” BRIC economies stagnating, new countries such as the “CIVETS” (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) are being touted as the new regions for strong growth. Companies who have sell services online (such as newspaper or online information businesses) may like to consider launching foreign language sites in BRIC and CIVETS countries.
  • Embrace the cloud: IDC estimates 226,000 jobs will be created in the UK between now and 2015 as a result of investment in public and private IT cloud services and also suggests IT innovation created by cloud computing could provide $1.1bn a year in new business revenues. Whilst this is provides obvious opportunities for cloud computing providers, data centre operators and server manufacturers, it also offers opportunities for businesses across the TMT sector to realise the tremendous cost savings available from the technology.
  • Take advantage of an upturn in IT expenditure: Gartner predicts enterprise software expenditure will rise by 6.4% in 2012 and expenditure in telecommunications would see a 6.9% rise. Overall, worldwide IT expenditure will total $3.8tn in 2012 – an increase of 3.7% on 2011. Whilst holding off expenditure during the downturn, businesses are now being forced to update outdated hardware in their organisations which will see increased demand for both hardware and software services.
  • Monitor when superfast 4G will be launched later in the year: Everything Everywhere and Three have announced that they are to launch 4G LTE by the end of the year which will drive uptake in new handsets and will, in turn, have obvious benefits across the whole sector (mobile app developers, telecoms operators and even advertising agencies who will see increased demand for advertising on platforms such as YouTube). The new technology will effectively revolutionise internet access through handheld devices, effectively meaning people using smartphones and tablets with a 4G connection will be able to experience download speeds akin to superfast broadband. Watch out wifi providers!
  • SMEs look set to be the highest spenders in technology this year: IT expenditure is set to be particularly high by small businesses over the next year: according to a report by Computer Economics, small businesses plan to grow spend by a median of 2.0% in 2012, 0.5% for medium businesses and 0.8% for large businesses. Healthcare, professional services and manufacturing will help to drive the rise. Targeting the right size businesses in the right sectors could help reduce marketing overheads and reap the quickest gains.
  • Embrace the opportunities of online advertising: Many print businesses are currently failing to effectively convert print advertising into online sales – a new report by Pew Research shows that for every $7 lost in print advertising, only $1 is generated in new digital advertising sales. Many businesses are struggling to adapt to the huge opportunity offered by online advertising, and those that do are reaping the gains: one newspaper reportedly increased its digital ad revenues by 33 per cent in 2011 by hiring salespeople focused on sales of online advertisements. The launch of the new iPad looks likely to stimulate online ad sales even further, with the prospect of improved display screens and 4G services by the end of the year.

Other relevant information

Listen to TMT Podcasts

Contacts

Julian Frost Head of TMT

Danny Dartnaill Partner

Other contacts

TRANSPORT AND LOGISTICS

VITAL SIGNS

Growth in the transport sector is closely tied to growth in the economy as a whole

Overview

As growth in the transport sector is so closely tied to UK GDP, Cebr expect transport failures to rise slightly this year, as growth remains weak, and then to fall from 2013 onwards.

Drivers

UK GDP growth: Sluggish growth in the short-term

UK GDP growth is likely to remain sluggish in the short-to-medium term, as fiscal austerity and weak consumer demand bear down on the overall pace of recovery. This will curb domestic demand for goods in the UK, which in turn will reduce demand for the services offered by the transport sector.

Transport costs: Transport costs remain high

Transport costs remain high, linked to the high price of oil. In February 2012, unleaded petrol prices were some 4.8% higher than a year ago, while diesel prices were some 6.6% higher. Rising oil prices as a result of political tensions in the Middle East risk pushing up transport costs still further.

Oil prices: Middle East tensions risk triggering an oil price spike

Despite concerns about the strength of the global economy, oil prices remain stubbornly high and recently reached a record high in pound sterling terms. Political tensions in the Middle East risk triggering an oil price spike, which could lead to a surge in transport costs.

Sector talking points

  • Consolidation

It is quite likely that international logistics firms will be circling Wincanton during 2012. Norbert Dentressangle (ND) on the back of their significant growth in UK, following the acquisition of Christian Salvesen in 2007 and TDG in 2011 have the firepower to look at an acquisition such as Wincanton. Other international players such as Kuehne + Nagel, DSV and DHL will certainly be monitoring Wincanton performance.

2012 will be another challenging year and consolidation is a natural defence to a static or shrinking market. I would expect to see a continuation of bolt-on acquisitions from all the leading UK and wider European Logistics businesses. In the UK companies such as Bibby Distribution and Boughey Distribution remain acquisitive, both looking to strengthen their national transport and logistics coverage. Across Europe, the major logistics businesses will remain open to looking at M& A opportunities, although large transactions may be on hold while significant economic uncertainty remains. Niche logistics businesses that can differentiate their service proposition remain attractive but more generalist transport operations will increasingly find competition focusing on winning key customer contracts rather than paying a premium for the business.

  • Over capacity

UK transport prospects are directly linked to consumer spending trends and therefore with an economic slowdown, road transport volumes are struggling. This has created significant over capacity in the market. Set out below are a number of responses operators are using to weather this:

- Reduce use of subcontractors to improve own fleet utilisation

- Hand back all “spot hire” fleet

- Depending on fleet finance options:

1. Do not replace fleet out of finance term

2. Potentially hand back fleet early to the dealer

3. Some fleet financing packages have such competitive pricing that it can cost less to park-up certain fleet and improve utilisation than incur the additional fuel and driver costs to run more vehicles less efficiently.

Where certain fleet operators are not able to flex their fleet quite so easily or owner operators need to work just to be able to survive there is a growing pressure on transport margins with many transport providers willing to “buy” work at a marginal cost to keep the business operational. This is only a short term option and with UK recovery some way off, there will be sadly more business failures either voluntarily or through creditor actions.

  • Service differentiation

A positive trend is the growing number of logistics companies looking to offer complementary freight forwarding solutions to provide a more “end to end” solutions for key customers. This is an attempt to differentiate service and become more embedded in their customer supply chains. Norbert Dentressangle entered this market in 2010 with the acquisition of Schneider International but at a UK level, companies such as Bibby Group, Meachers Global Logistics and Rhys Davies Freight Logistics are all looking to grow freight forwarding operations particularly linking with the growing Middle East and Far East markets.

While buying into freight forwarding may not be an option to all transport providers, the importance of understanding your customers supply chain and being proactive in getting involved should only be seen as a positive action.

  • Sustainability

“Understand your own carbon footprint”, customers will be asking you. There are immediate areas that should be reviewed and may offer easy wins:

1. Flexibility of fuel

2. Driver training / fuel efficiency

3. Transport planning and tracking

Understand how you fit into the wider supply chain of your clients and why your performance is important to delivering on the targets they have set for themselves. For some organisations, this can be a significant issue when it comes to procurement decisions.

Look to be proactive in discussions about how to minimise empty miles or turnaround times at depot drop offs. Saving money for you could potentially be shared with your customers. A move to double deck trailers for store deliveries saved Asda £5.2m; 4,700 tonnes of carbon and 3.6m miles along with the obvious improvement in productivity.

Explore with your clients their whole transport and logistics requirement to identify areas of possible efficiency:

1. Can a partnership approach with other transport companies or a direct link with freight forwarders improve utilisation

2. Are there other transport options available such as rail

3. Do you have other customers that could benefit from some sort of shared transport agreement

This “Green Agenda” is now part of mainstream decision making and offers the potential for true differentiation for businesses that embrace the opportunity.

Contacts

Samuel Irving Transport and Logistics

Simon Pringle Sustainability

Business Restructuring contacts

Other contacts

Professional Services

VITAL SIGNS

The sector accounts for the largest proportion of UK output

Overview

The professional services sector plays a major role in UK trade as one of Britain’s most successful exports. As the UK economy has shrunk in recent times, the demand for professional services has also contracted.

Like many other sectors, professional services firms will be increasingly looking to expand into new markets as demand in domestic markets remains sluggish. The increasing westernisation of emerging economies is leading to increased demand for professional services companies. Furthermore, a number of measures are coming into play in 2012 which will make it easier for firms to engage in cross border practice. Failures in the business service sector are expected to rise in 2012, as global economic growth weakens and domestic demand for business services remains subdued.

Services PMI: Still pointing towards expansion

The Markit/CIPS services purchasing managers’ index stood at 53.8 in February, down from 56.0 in January. However, the index remains comfortably above the 50 mark which separates growth from contraction.

Business confidence: Business services faring relatively well

The ICAEW Business Confidence Monitor (BCM) showed confidence for the business services sector in negative territory in Q1 2012, though less negative than for the economy as a whole. Similarly, the Federation of Small Businesses Voice of Small Business Index shows firms in business services performing relatively favourably.

Drivers

UK GDP growth: Sluggish growth in the short-term

UK GDP growth is likely to remain sluggish in the short-to-medium term, as fiscal austerity and weak consumer demand bear down on the overall pace of recovery. This will curb domestic demand for business services in the UK.

International economic outlook: Eurozone debt crisis risks curbing demand for services exports

The outlook for the global economy has weakened over the past year, as the sovereign debt crisis in the Eurozone risks destabilising the global financial system. Cebr expect the Eurozone economy to enter recession and contract by 0.6% this year, which will bear down on demand for business services in the Eurozone. About 40% of the UK’s services exports go to the European Union.

However, growth opportunities across the globe remain, and business services firms exporting to fast growing emerging markets should have strong potential for robust export growth. The Chinese economy is expected to grow by 7.6% this year, while the Indian economy is expected to grow by 6.0%.

Sector talking points

  • Alternative billing: Professional services firms will look increasingly to alternative billing methods in order to remain competitive. The traditional “billable hour” is now losing importance, with clients increasingly requesting flat or fixed fees. Volume discounts are also increasingly being asked for, and legal firms are seeing a rise in the number of clients who are seeking to pay only on successful outcomes.
  • Globalization: Like many other sectors, professional services firms are increasingly looking to expand into new markets when demand in domestic markets remains sluggish. The increasing “westernisation” of emerging economies is leading to increased demand for professional services. Furthermore, a number of measures are coming into play in 2012 which will make it easier for firms to engage in cross border practice. An increase in M& A is predicted as firms see inorganic expansion as the way forward.
  • Increasing regulation: Firms will have to grapple with increasing regulation going forward. Financial services firms will be subject to more stringent regulations in the wake of recent issues and trading is set to have to follow more stringent guidelines – which will involve significant outlay by companies in order to meet these requirements.
  • Changes to the legal landscape: Law firms are concerned that the new “alternative business structure” (ABS), which effectively allows non-legal companies to provide legal services to customers, cause competition within the legal market. Law firms need to ensure that they have reviewed their strategy and have a clear idea of their vision for the future.
  • Outsourcing to continue at pace: Professional services firms will continue to outsource work, with law firms increasingly outsourcing document review, due diligence and research/analytics to external legal process outsourcing provider. Other professional services firms who offer outsourcing services will also directly benefit from the trend to outsource F& A, HR and other outsourcing services.
  • Increased hiring of temporary and contract staff: Recruitment companies will see increased demand for contract and temporary employees in 2012 as businesses start to grow as we emerge from the recession – but want to avoid costly processes involved in hiring permanent staff until budgets are less restrained. Companies will continue to limit the number of new staff hired. There will be fewer promotions to partner across the professional services sector.

Other relevant information

After the downturn

Contacts

Nick Carter-Pegg Head of Professional Services

Andy Beckingham Partner

Other contacts

LEISURE AND HOSPITALITY

VITAL SIGNS

The ongoing squeeze on consumer spending makes for a tough trading environment.

Overview

The discretionary nature of the goods and services sold in the leisure sector means that the ongoing squeeze on consumer spending power in the UK makes for a tough trading environment. Consequently, we expect leisure business failures to rise over 2012.

The British consumer still enjoys being enticed to spend, embracing social media when it comes to discount vouchers and rewarding brands with a relentless focus on customers. The rewards are still there for those with the appetite to continually review and refresh operating models and market assumptions.

Indicators

Tourist spend: Estimated growth of 5.0% in 2011

Overseas tourist spend in the UK was 9.0% higher in Q3 2011 than in the same quarter a year ago and is expected to have grown by 5.0% in 2011 as a whole. The Olympic Games may lead to a boost in tourist spend in the summer of 2012, though this may be offset by reduced tourist spending in other periods of the year. The continued weakness of sterling relative to the euro and the dollar ought to make the UK a relatively attractive destination for tourists over the coming years.

Drivers

Consumer spending: Only modest growth this year

After falling by 0.8% last year, we expect consumer spending to rise by a very modest 0.2% this year. While falling inflation in 2012 will provide some respite to households, this will be partially offset by the negative effects of rising unemployment and weak earnings growth. Consequently, the outlook for consumer spending and thus retail sales remains tough.

Real incomes: Family spending power flat in 2012

Last year, households saw a 1.6% decline in real disposable incomes and this resulted in a 0.8% decline in consumer spending. This year, household incomes are likely to be effectively flat, which will squeeze consumer spending power and curb expenditure on leisure. From 2013 onwards, real household income growth is likely to pick up as earnings growth recovers and increases in Income Tax free personal allowances boost take home pay.

Unemployment: Unemployment rate set to rise to 9.0% by the end of the year

Unemployment in the UK is expected to rise over the coming months, with the unemployment rate rising to 9.0% in the last quarter of 2012, up from 8.4% in the last quarter of 2011. This will constrain growth in consumer spending in the short term by bearing down on household spending power.

Consumer confidence: Remains firms in negative territory.

Consumer confidence remains fragile – the GfK index of consumer confidence stood at minus 29 in January 2012. Although this is up 4 points from December it is still disappointing, being worse than most of the monthly figures in the first half of 2011. Despite this 4 point improvement, which was partially a result of falling CPI inflation, consumers remain deeply worried due to rising unemployment and spillovers from the Eurozone sovereign debt crisis. This is likely to constrain consumer spending – and thus leisure spending - this year.

Consumer credit: Growth still much more modest than before the recession.

Consumer credit conditions are likely to remain tight in the short-term, meaning that only modest growth in consumer credit is likely. Consumer credit grew at a relatively slow rate of 1.9% in 2011. This compares with the period 2000-2007, when consumer credit grew at an average annual rate of 12.4%. Relatively weak consumer credit growth compared with before the recession will curb consumer expenditure and thus bear down on leisure spend in the short-term.

Interest rates: Base rate on hold throughout 2012.

The Bank of England base rate is expected to remain on hold throughout 2012, which should keep other interest rates relatively low too. This should support leisure spending in the economy, though the positive effect of low interest rates is being partially offset by tight credit conditions.

Sector talking points

  • Consider menu engineering options
  • Examine local sourcing options for fresh products
  • Take advantage of social media marketing platforms
  • Recruit talent from struggling operators
  • Focus resources on key markets and flex employee hours
  • Improve cross selling through increased utilisation of customer data

Other relevant information

What does the Budget 2012 mean for the Leisure and Hospitality Sector

Social Media in the Leisure and Hospitality Sector

Restaurant and Bars Report

Industry Issues

Contacts

John Le Poidevin Head of Leisure and Hospitality

Tony Nygate Partner

Other contacts

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