Greater Manchester Forecasting Model: 2008 forecasts
Economic Forecasts for Greater Manchester
A summary of the Greater Manchester Forecasting Model (2008 update)
January 2009
For queries please contact:
Adrian Nolan
Economic Forecasting Manager
Association of Greater Manchester Authorities
Tel: 01942 705717
Email:
CONTENTS
1 ECONOMIC FORECASTING MODELS 3
2 RISKS TO THE FORECASTS 3
3 SUMMARY: KEY MESSAGES FOR GREATER MANCHESTER 3
4 GLOBAL AND UK ECONOMIES 3
5 NORTH WEST ECONOMIC OUTLOOK 3
6 GREATER MANCHESTER’S ECONOMIC PROSPECTS 3
7 DISTRICT FORECASTS 3
8 APPENDICES: KEY SECTORS 3
1 ECONOMIC FORECASTING MODELS
A forecasting model is a complex statistical tool that forecasts change, using analysis of past trends. Primarily the value of this model is in highlighting likely future trends in the economic, demographic and housing environments, rather than making detailed predictions about the scale and nature of growth.
Forecasting models are based on a series of assumptions about how the real world functions. These are based upon nationally validated datasets and observed relationships between different variables. Ideally a local model should nest within a suite of regional, national and world models and this is the case with the GMFM.
Forecasting models do not necessarily tell you what will happen in the future; they assume the future will see the same sort of relationships between different economic and behavioural variables as in the past. In other words, if the modellers can analyse what different driving forces have affected what has happened historically to a particular facet of the economy or market behaviour and how these driving forces have influenced it, then it is reasonable to assume that the same driving forces are likely to have a similar effect in the future.
Any economic forecast is what the forecaster views as the economy’s most likely future performance, and as such will always be uncertain. There is always potential for error in any forecasting model due to uncertainty in both the model and the data that it relies upon, in addition to ‘external shocks’, such as war, enhanced geo-political tensions, oil and gas prices, for example. These events can have considerable impacts upon the economy, and forecasting models cannot anticipate these events or the impact of them. In short, economic forecasting provides an indication of what is likely to happen in the future, not what will happen. It is for these reasons that forecasting models should always be only one part of the suite of research intelligence tools in understanding the economy of any locality.
It is important that these forecasts should not be viewed as deterministic – they are Oxford Economics informed view of what they believe will happen in the economy should current trends continue, and it is important while used in the formation of strategy and policy, they are not the only evidence used to plan, being part of a wider evidence base.
‘Policy on’ vs ‘Policy off’ forecasts
It is worth emphasising that the GMFM base forecast is “policy-off”. Although more complex than simple projections of past trends, a policy-off forecast assumes that the relationship between economic variables will remain unchanged. For example, Oxford Economics may make an assumption that recent migration trends are unsustainable and incorporate a fall in migration rates in their base forecast. However, the economic relationship between migration rates and working age population remains unchanged.
The GMFM can produce ‘policy-on’ scenarios. The most widely used scenario has been the Accelerated Growth Scenario (AGS), which accounts for an interplay of factors and influences to bring about an overall improvement in performance that exceeds that anticipated in the base forecasts. In effect, such a scenario demonstrates the value added by intervention in the market.
2 RISKS TO THE FORECASTS
· There are difficulties for forecasters in a volatile economic environment and it is important to note that these forecasts are subject to margins or error, and together with any economic forecast at this time, there is a degree of uncertainty. The potential for the economic downturn to be more severe than is set out in these forecasts is greater than the potential for a more positive outlook:
o The key downside risk to these forecasts are if consumers retrench and further increase their savings, rather than spend. This largely depends on consumer confidence and particularly fear of job loss, in addition to the banks ability (and willingness) to lend.
o There is also a risk that the medium term outlook of an increase in world demand and consequently the UK economy, which underpin the forecasts, may not occur at the levels required.
o There is the possibility of higher growth, particularly with the considerable and sustained levels of monetary and fiscal policy stimulus being provided – it is too early to judge the success of these current actions however.
· Further to the above point, it is notable that economic conditions have been changing at an unprecedented scale and pace, particularly in the last quarter of 2008 and January 2009. As they were set in late November 2008, with conditions having further deteriorated since, these latest forecasts can be construed as leaning towards a more optimistic outlook in the current climate. This should be accounted for when using these forecasts, although at the time of writing the possibility of improvements on current conditions in the months ahead cannot be discounted, whether due to a pick up in demand or fiscal and/or monetary policy beginning to have a positive effect.
· The above risks to the forecasts reinforce the guidance that they should not be seen as definitive – they are a guide based on the best available information together with the informed view of economists, but should always only be a part of the intelligence base, in particular in times of economic uncertainty where conditions are changing rapidly.
3 SUMMARY: KEY MESSAGES FOR GREATER MANCHESTER
Recessionary conditions in the short term:
· Greater Manchester, as a key regional centre in exporting goods and services, will be adversely affected by the recession, with a fall in employment expected between 2008 and 2010 – across the sub-region this is forecast to total at around -37,000 over this two year period. It is likely to be 2014 before employment levels are back at where they were in 2008.
· This fall in employment will be driven by weak economic performance between 2008 and 2010, with economic output, or GVA, in Greater Manchester expected to increase by only 0.3% in 2008 and fall by 1.0% in 2009. Growth is forecast to return in 2010, albeit only limited at 0.8%. A ‘V’ shaped recession is expected – a short but sharp downturn followed by a quick upturn.
· 2009 is likely to be defined by unemployment and consolidation by both households and businesses. Unemployment has been rising throughout 2008, with those on jobseekers allowance (a key determinant in capturing ‘real time’ data for those looking for work) in December 2008 at its highest rate since the beginning of 2000, and is likely to spike to mid-1990’s levels, rising above 5%.
· The recession is likely to have a wide sectoral reach across Greater Manchester over the next two years, with Greater Manchester’s sizable service based economy potentially making it more vulnerable to recessionary impacts. The largest falls in employment are forecast to be in Financial and Business Services and Manufacturing. The major fall in demand for Construction services is also expected to result in significant job losses, and as business and consumer spending falls, Distribution and Retail will also suffer throughout the sub-region.
Stronger long term growth is forecast:
· A key message however is that in the long term the Greater Manchester economy is forecast to recover strongly – from 2011 to 2018, GVA is forecast to grow at an average of 2.75% per annum, which would translate into growth in employment (45,000 in total between 2008 and 2018 / 81,000 between 2010 and 2018).
· The longer term growth is likely to be spread across several sectors, with Greater Manchester’s diverse business base important in its long term prospects. A key assumption though is that Business Services will be key in driving employment growth in addition to Health and Education.
Population and household growth projected in short and long term:
· Population growth in Greater Manchester is likely to be considerable (around 130,000 over the next decade) due to natural increase, which is expected to continue to grow very strongly, reflecting recent trends in high birth rates and expectations of people living longer due to advanced medical care. However working age population is expected to grow at a lower rate than the total population (0.2% per annum compared with 0.5% per annum for the total population).
· Household growth is forecast to be robust over the long term (over 85,000 over the next ten years). This may be due to a shift in headship rates, with an increase in the number of younger people being the head of their own household, high divorce rates as well as reflecting the aging population – older people being more likely to own their own home.
4 GLOBAL AND UK ECONOMIES
To understand the forecasts produced for Greater Manchester, it is important to comprehend the wider economic conditions, as the assumptions about global and UK economic activity are key factors underpinning the Greater Manchester forecasts. Global and UK conditions can be summarised as follows:
· In the short term, economic growth is being slowed considerably by major market volatility which is feeding through into the real economy. 2009 is likely to be particularly difficult for the global and UK economy, with unemployment and financial consolidation for both households and businesses a key feature. Unemployment has already been significantly impacting upon western economies in the latter half of 2008, particularly within the US, where over half a million jobs were lost in November 2008, the largest monthly job loss since 1974.
· Recession amongst most developed countries (primarily the US and Eurozone) is now inevitable due to collapse in the lending markets and total loss of confidence amongst businesses and consumers. Other key emerging markets such as China and India, which were initially expected to pick up some of the slack, are now facing considerable slowdowns themselves, albeit while still growing robustly (e.g. China’s GVA growth down from 12.4% in 2007 to 8.4% in 2009).
· A key assumption in the GMFM is for increased demand in 2010, with a recovery period thereafter based on increased liquidity and confidence in the markets (partly based upon continued fiscal policy measures) with monetary policy focused upon low interest rates, with low inflation continuing in the medium term.
Figure 1: Global economic growth forecast up to 2012
· Figure 2, below, shows recent average house prices across the UK, and despite the range in monthly and annual change, the trajectory is very much downwards, with no apparent bottoming out of the house prices evident as yet. Coming into 2009 prices continue to fall, further sharp price corrections are likely as job security fears increase due to the rapid upward trajectory in unemployment and the tighter lending regime from mortgage lenders.
Figure 2: Average house prices with monthly and annual change, November 2008
Source / Average House Price / Monthly Change / Annual ChangeHalifax House Price Index / £163,605 / -2.6% / -14.9%
Nationwide House Price Index / £158,442 / -0.4% / -13.9%
Land Registry / £165,529 / -1.5% / -10.1%
Source: Halifax, Nationwide and Land Registry
· This collapse in confidence in the housing market is reflected in the increasingly negative state of the labour market – the total number of UK Job Seekers Allowance claimants (a real time measure of people who are out of work but still in the labour market seeking work) was up in December 2008 by over 360,000 on the previous year, now over 1.1 million.
· The depressed economic conditions in the UK has meant that consumer behaviour is changing as retrenchment occurs – the last decade of economic growth has been based upon increased spending and borrowing, at levels which are not likely to return in the foreseeable future. Therefore a key factor of the recession will be consumers saving rather than spending, with savings ratios set to increase in the short term. The severity of the slowdown is likely to depend on how much consumers retract their spending.
· Inflation is continuing to fall, a sharp contrast with conditions over the last year, where the preoccupation of the Bank of England’s Monetary Policy Committee (MPC) has been to control rising price pressures, where the price of crude oil was a particular concern. Policy makers are now attempting to stave off the possibility of deflation (falling prices across the economy) which results from a lack of demand.
· Order books are continuing to deteriorate (Figure 3, below), another sign of the deepening crisis and further evidence of the UK falling into recession. The Quarterly Economic Survey from the British Chambers of Commerce shows a marked collapse in confidence in the final quarter of 2008, making smaller firms the most vulnerable although businesses on a range of scales are being affected – other crucial balances in addition to home orders, such as profitability and business investment, fell rapidly in both Manufacturing and Services during Quarter 4 of 2008.
· Firms are reporting that current and recent fiscal stimulus has yet to have a noticeable effect on trading, and for Manufacturing in particular, the historic low value of the pound is not yet helping exports due to weak global demand.
Figure 3: UK Home Orders for Services and Manufacturing
Source: British Chambers of Commerce, January 2009
5 NORTH WEST ECONOMIC OUTLOOK
· Economic growth in the North West is projected to be considerably affected by the weakening wider economic environment, with key economic indicators of GVA and employment reporting notable falls over the next two years. Figure 4 shows that it could be 2016 before employment levels are higher than in 2008, highlighting the extent of the slowdown. With GVA growth forecast to contract by nearly £1bn in 2009 as the effects of the recession are at their most pronounced employment is expected to decrease by around 90,000 between 2008 and 2010, with Greater Manchester accounting for over a third of this.