Economic Outlook April 2012

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Economic Outlook April 2012

  1. 1. Economic OutlookIssue 6 – April 2012Paul Hutchings and Patrick Woodman
  2. 2. Introduction The Economic Outlook research series from the Chartered Management Institute (CMI) examines and tracks managers’ views on the economy. Now in its sixth edition, this report presents the results from the Economic Outlook survey which is conducted on a six-monthly basis among a sample of CMI’s membership. The research provides regular and relevant insights into the state of the economy and the impact it is having on UK organisations. It reviews managers’ expectation of future economic performance and the actions they are taking to steer their organisations through the challenges they face. It also assesses managerial support for a range of public policy measures to provide commentary on what measures management professionals would like to see implemented. Methodology Between 15 March and 10 April 2012 CMI invited 15,000 of its members to complete an online survey. A total of 701 responses were received from across the UK, from a range of industry sectors across the economy and from managers at different seniority levels up to directors and chief executives. Where reference is made to net percentage points, such as the net level of employer optimism, this figure is calculated by subtracting the percentage of those who are not optimistic from the percentage of those who are optimistic. Due to rounding charts and tables displaying percentage figures may not add up to 100. This report has been prepared by Paul Hutchings and Patrick Woodman at CMI. Copyright Chartered Management Institute © First published 2012 Chartered Management Institute 2 Savoy Court, Strand, London WC2R 0EZ All rights reserved. Except for the quotation of short passages for the purposes of criticism and review, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of the publisher. British Library Cataloguing in Publication Data A CIP catalogue record for this report is available from the British Library ISBN 0-85946-408-32
  3. 3. Foreword In my foreword to our last Economic Outlook report, in October 2011, I wrote that “managers and leaders clearly perceive the British economy to be on the verge of a double dip recession”. We now know that the economy did indeed contract in the months that followed, and the UK has slipped back into recession. What is more, the GDP figures are only part of the story. The eurozone has experienced a rolling crisis in recent months and many analysts would not yet discount the possibility of eurozone fragmentation. Here in the UK, the latest inflation figures suggest that consumer demand will remain muted. Unemployment remains high, despite recent welcome signs of improvement – and the cost of energy remains a major source of concern. It is evident that a large part of management opinion remains deeply wary of such a toxic mix. A persistently high percentage of the managers surveyed for this series – over 80 per cent – report that these conditions are having a detrimental effect on their organisation. Managers expect their organisation’s investment to be limited or reduced in many categories. Some companies have developed substantial cash surpluses and it is evident that many managers remain deeply cautious about how best to use them. Yet there are also signs that the worst may be behind us. Optimism about the next six months has increased, particularly in the private sector. Time will show whether this optimism translates into real economic activity, supported by an expansion in demand and investment decisions that promote growth. Official predictions for growth are at levels that would have been regarded, for much of the last decade, as anaemic – yet would, in the current situation, be very welcome. We all need to adjust our expectations. If the supply of financial capital is limited, then I believe we must refocus on our human capital. That means the skills of our people: and there are few skills more important than management and leadership when it comes to critical challenges like cutting costs, cultivating innovation and maximising new opportunities. Yet this survey shows that management skills shortages are an increasing source of concern – and 79 per cent expect their budgets for management and leadership development (MLD) to be capped or cut this year. When recent research has shown that effective development improves organisational performance by 23 per cent1, these findings suggest a lack of investment in MLD will continue to harm UK economic performance. Indeed, our members support policy measures to build human capital, such as tax breaks to incentivise employer investment in skills, as well as measures to release more financial capital to business by improving bank lending. Government has an important role to play in setting the right policy framework. I hope that, in six months’ time, we are no longer talking of recession but of a steady return to growth. Christopher Kinsella Acting CEO, Chartered Management Institute 1 The Business Benefits of Management and Leadership Development, McBain et al, CMI, February 2012 www.managers.org.uk/MLDbenefits 3
  4. 4. Summary of findings The UK economy •• Impact of the current state of the economy – 83 per cent of managers report that the state of the economy is having a negative impact on their organisation. This number has held steadily above 80 per cent since March 2009. Only six per cent think that the state of the economy is beneficial to their organisation, with the remaining 10 per cent suggesting that it has no impact. •• Impact of the economy by sector – managers from the public and not-for-profit sectors are most negatively affected by the economy with 92 per cent and 91 per cent reporting a damaging impact on their organisation. This is lower, but still high, among private sector managers (78 per cent). •• Economic growth over the next 12 months – managers are pessimistic about the direction of a number of key macro-economic indicators. Over the next 12 months they expect reductions in the rate of GDP growth, consumer spending and levels of employment, and they predict that business insolvency, household debt and the cost of credit will increase. UK organisations •• Employer optimism – managers’ reservations about the prospects for the wider economy are reflected in their assessment of the prospects for their own organisations. It is still the case that more managers feel pessimistic than optimistic about the outlook for the next six months, with a net score of -4 points, despite an improvement from -20 six months ago. •• Long term outlook – managers’ opinions are more positive about their prospects over the next three years, with a net score of +26, a ten point increase on our last survey. •• Improved private sector optimism – the differences between managers in different sectors are stark. Among public sector managers, the net score is -35 over a six month period, rising only to -25 when looking ahead three years. By contrast, private sector managers give a net optimistic response both in the short and the longer term, rising from +11 when considering the next six months, to +53 for the three year net score. •• Employer investment – managers suggest that employer investment over the next six months will decrease in many business areas, with marketing and business development the only categories where spending increases are more commonly expected. Thirty-five per cent expect cuts in training and development and 32 per cent expect cuts in management and leadership development activities, despite skills shortages being highlighted as having a damaging impact on businesses. •• Focusing on costs – the most common management response to economic conditions over the last six months has been to cut costs. Fifty-seven per cent of managers report pay freezes, 50 per cent an attempt to reduce business overheads and 49 per cent a recruitment freeze in their organisation. •• Availability of finance – 93 per cent of managers report that the availability of finance for both short-term needs and long-term investment has deteriorated or remained the same over the last six months. •• Damaging economic factors – 67 per cent of managers think the high cost of energy will have a detrimental impact on their organisation over the next six months. The level of government debt is seen as the second most common barrier to growth, reported by 81 per cent of public sector managers as having a damaging impact on their organisation.4
  5. 5. UK managers •• Job security – job insecurity continues to be an issue with 43 per cent of managers feeling insecure in their current job, although this is down from 48 per cent. Insecurity rises to 60 per cent in the public sector. •• Morale – employee morale continues to suffer with 64 per cent of managers reporting that it has got worse over the last six months.Policy measures •• Austerity measures – 59 per cent of those surveyed report that the Government’s austerity programme is having a damaging impact on their organisation. This rises to 83 per cent in the public sector and falls to 45 per cent in the private sector. Despite the concerns over its impact, an increasing number of managers report that the Government’s deficit reduction strategy is being implemented ‘at about the right pace’ (up to 43 per cent from 39 per cent six months ago). •• Skills development – 82 per cent of respondents would like to see tax breaks given to employers for investing in skills. Managers’ understanding of the importance of skills development is also seen in the fact that 81 per cent support the expansion of funding for apprenticeships, while 67 per cent call for greater employer influence over public investment in skills. •• Taxes – 91 per cent of managers support the simplification of business taxes. A bespoke capital allowance scheme for SMEs is also popular among managers, with 70 per cent supporting this policy. Access to credit remains a real concern to managers with 84 per cent urging Government to strengthen measures to improve bank lending to businesses. •• Infrastructure – a clear majority of managers feel that government should direct investment towards transport infrastructure (72 per cent), whilst just under half support investment in green infrastructure (45 per cent).Commentary on findingsThe UK economy The continued economic stagnation of the UK economy since the recession in January 2009, and its latest return to recession, is leading some to draw comparisons with Japan’s lost decade. This Economic Outlook shows that managers are suffering the effects of the UK’s stalled economy. Eighty-three per cent report that the economic conditions are negatively affecting their organisation, a figure that is comparable to those of six and 12 months ago (84 and 86 per cent respectively). The number of respondents reporting that the economy is having a harmful impact has held steadily above 80 per cent since March 2009. Figure 1 Impact of economy Significantly negative impact on organisation Slightly negative impact -43 -40 10 51 No impact Slightly positive impact Negative % Positive % Significantly positive impact Combined with the Government’s budget deficit reduction programme, the conditions are hitting those in the public and not-for-profit sectors the hardest, with 92 per cent of public sector managers and 91 per cent of not-for-profit managers reporting a negative impact. This compares to 78 per cent in the private sector. Across all sectors, just six per cent of managers suggest the UK economy is having a positive impact on their organisation. 5
  6. 6. Economic Reflecting the UK’s return to recession, managers are pessimistic about the direction of indicators a number of key economic indicators over the next twelve months. With many managers highlighting access to credit as a key barrier to growth, it is worrying that two-thirds believe the cost of borrowing is set to increase. Seventy-one per cent think that business insolvencies will increase, though this is down from 76 per cent six months ago and 80 per cent one year ago. Three quarters of managers expect employment levels to either stagnate or decrease over the same period and 91 per cent expect stagnation or a fall in consumer spending. Half of managers expect no significant shift in GDP growth and 27 per cent expect a further decline in the rate of growth. Only 17 per cent expect growth to accelerate although this number has more than doubled from six per cent six months ago. Management The findings on management optimism continue the trend of modest improvements over optimism the last 12-18 months. As Figure 2 shows, in the private and not for profit sectors, the number of managers who are optimistic about their organisations’ prospects for the next six months now outweighs the number who are pessimistic. This is the first time this has been the case for the private sector since September 2010. Figure 2 Management optimism % net optimism over next six months 50% by sector 40% 30% 20% 10% Private sector 0% Public sector Not for profit sector -10% -20% -30% -40% -50% Sept ’08 March ’09 Sept ’09 March ’10 Sept ’10 March ’11 Sept ’11 March ’12 By contrast, net optimism about the next six months continues to lag behind in the public sector, with a highly pessimistic score of -35. Nonetheless, this is 14 points better than the low recorded in September 2010. As with previous findings in this series, managers tend to be more optimistic over the longer term than the short term. This is particularly true in the private sector, where managers are considerably more optimistic over the longer term. Net optimism measures for the next twelve months and three years now stand at +33 and +53 (up from +7 and +41 six months ago). However, optimism in the not-for-profit sector and public sector over the long term remains stubbornly low. With private sector growth vital to the UK’s economic recovery, policy makers will be hoping that increased optimism translates into growth.6
  7. 7. Figure 3Management optimism % net optimism over time by sector 60% 50% 40% 30% 20% 10% 0% -10% Private sector Public sector -20% Not for profit sector -30% -40% -50% 6 months 12 months Three years Employer Reflecting on barriers to growth, 67 per cent of managers highlight the cost of energy as challenges likely to have a damaging impact on their organisation over the next six months. Across all sectors, the level of government debt is the second highest barrier to growth, selected by 54 per cent of managers. Unsurprisingly, public sector managers rate this as their number one barrier. Management skills shortages are the next highest barrier overall, with 38 per cent expecting them to have a damaging impact on their organisation. Figure 4 80% Factors impacting on Cost of energybusiness over the next 70% Levels of six months: per cent Government debt damaging impact 60% Management skills shortages 50% Pension liabilities Employment disputes 40% Levels of personal debt 30% Labour shortages Changes in value of the pound 20% Availability of credit Reducing carbon 10% emissions 0% March ’09 Sept ’09 March ’10 Sept ’10 March ’11 Sept ’11 March ’12 The Chancellor used the 2012 Budget to update business on plans for implementing the £1 billion Business Finance Partnership programme, but managers continue to report concerns about the availability of finance. Ninety-three per cent report that the availability of credit for both short term and long term projects has got worse or remained the same over the last six months. 7
  8. 8. Figure 5 Managers reporting availability of finance 60% 50% Work in progress and 40% short term needs (worse) Long term investment (worse) 30% Work in progress and short term needs (better) 20% Long term investment (better) 10% 0% Mar ’09 Sept ’09 Mar ’10 Sept ’10 Mar ’11 Sept ’11 Mar ’12 This data suggests that the Government still has much to do to improve the availability of finance for businesses wishing to invest and grow. Unsurprisingly, as Table 3 (page 10) shows, there is strong support for the Government to strengthen measures to improve lending to businesses as a matter of urgency. Employer The last Economic Outlook noted that employer investment decisions have dropped investment and off since the beginning of the series in 2008. This edition still shows low expectations cost cutting of investment overall. In nine out of eleven categories, as shown in Table 1, managers believe that budgets will decrease over the next six months. Only budgets for marketing and business development are expected to see increases in investment. Nonetheless, the latest survey’s data offers signs that investment may be beginning to pick up. Across every area, net scores have improved since six months ago. For example, expectations for investment in recruitment have seen a 10 point net increase, which must be welcomed in light of the latest employment figures showing an 8.3 per cent unemployment rate2. Table 1 Sept ’08 Mar ’09 Sept ’09 Mar ’10 Sept ’10 Mar ’11 Sept ’11 Mar ’12 Net investment expectation over the Management consultancy -20 -30 -29 -23 -34 -33 -29 -26 next six months Recruitment -19 -38 -30 -22 -37 -37 -33 -23 Plant and machinery -11 -26 -28 -21 -24 -26 -25 -17 Training and development 13 -21 -16 -13 -23 -24 -23 -14 Management and leadership development n/a -22 -14 -10 -19 -22 -19 -13 Employee pay n/a -12 -10 -1 -18 -24 -18 -13 Corporate social responsibility 6 -9 -11 -6 -16 -14 -13 -9 Product research and development 11 -14 -14 -8 -17 -14 -12 -9 IT 16 -17 -10 -4 -16 -14 -9 -1 Marketing 31 7 8 16 1 1 6 8 Business development/sales 38 12 14 21 14 7 7 16 The findings show that cutting costs continues to be a priority for management, especially in the public sector as it adapts to spending cuts. Staff costs have been a key area for reductions in the last six months. As Figure 7 shows, rates of voluntary redundancies are over four times higher than in the private sector, whilst rates of compulsory redundancies are double those in the private sector. Overall 57 per cent of organisations have implemented a pay freeze and 49 per cent have implemented a recruitment freeze, rising to 82 and 72 per cent in the public sector. In the private sector, 56 per cent of managers are trying to reduce other business overheads. 2 http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/april-2012/statistical-bulletin.html8
  9. 9. Figure 6Organisational responses 90% to the current economic 82 conditions in the last six 80% 77 months by sector 72 70% 60% 60 56 50 52 50% Private sector 43 42 42 40% 39 36 Not for profit sector Public sector 30% 27 26 20% 17 10% 0% Frozen Reduced Recruitment Voluntary Compulsory pay levels business overheads freeze redundancies redundancies UK managers Employee morale levels continue to suffer with 64 per cent of managers reporting that they have got worse or much worse in the past six months. Unsurprisingly, given many of the findings in this report, 87 per cent of public sector managers report that morale has got worse over the same period compared to 65 per cent in the not for profit sector and 52 per cent in the private sector. Figure 7 Change in employee morale over the past Overall -39 -25 31 5 six months Much worse Private sector -40 -12 41 7 Worse Neither worse nor better Not for profit sector -50 -15 27 8 Better Much better Public sector -34 -53 12 Negative % Positive % Overall, perceived levels of job security have slightly improved, with those reporting they feel very insecure or insecure in their jobs fallings from 48 per cent six months ago to 43 per cent now. Encouragingly, the difference between men and women reported in the last Economic Outlook seems to have narrowed. Figure 8 60% Job insecurity by gender 50% 47 47 44 40% 33 35 33 Men 30% Women 20% Overall 14 9 10 11 10 10% 6 0% Very insecure Insecure Secure Very secure 9
  10. 10. Austerity and With the Government making tackling the deficit its number one economic priority, the survey deficit reduction asked managers what impact the austerity programme is having on their organisation. Across all sectors 59 per cent report that it is having a damaging impact on their organisation. This rises to 83 per cent in the public sector, whilst 64 per cent in the not-for-profit sector and 45 per cent in the private sector report a damaging impact. Despite the concerns over its impact, an increasing number of managers report that the Government’s deficit reduction strategy is being implemented ‘at about the right pace’ (up to 43 per cent from 39 per cent six months ago). Table 2 Spring 2011 Autumn 2011 Spring 2012 Managers’ views on the pace of deficit % % % reduction measures Not quickly enough 11 25 24 At about the right pace 40 39 43 Too quickly 48 36 32 Policy measures Over ninety per cent of managers are in support of measures to simplify the tax system and for growth 70 per cent are in favour of a bespoke capital allowance scheme for SMEs. Access to credit remains a real concern to managers with 84 per cent urging Government to strengthen measures to improve bank lending to businesses. Professional managers’ continued commitment to skills investment is again clearly visible in this edition’s data. Tax breaks for employers investing in skills and more Government funding for apprenticeships both receive above 75 per cent net support, whilst devolving greater control over skills funding to employers and learners enjoys a net support of 60 per cent. As debate about investment in Britain’s infrastructure continues, managers offer stronger support to investment in transport infrastructure (net support 65 per cent) than green infrastructure (net support 27 per cent). Table 3 Net level of support Agree Disagree Net level of support % % March 2012 % for possible economic policy measures Taxes should be simplified to encourage growth 91 3 88 Government should strengthen measures to improve bank lending to businesses as a matter of urgency 84 5 79 Government should provide tax breaks for employer investment in skills development 82 4 78 Government funding for apprenticeships should be increased 81 5 76 A capital allowance scheme for SMEs should be introduced to encourage investment 72 3 69 Government should direct investment towards transport infrastructure 72 7 65 Regulation of the financial sector should be tightened 73 11 62 Employers and learners should be given greater control over funding for skills development 67 7 60 Measures to reduce business regulation should be accelerated 68 14 54 The planned increase in business rates should be scrapped 64 11 53 Interest rates should be held at current levels 64 18 46 Business taxes should be cut 59 14 45 Government should direct investment towards green infrastructure 45 18 27 Public spending should be cut further 27 55 -28 Visa laws should be relaxed to support businesses in the recruitment of international talent 20 54 -34 Interest rates should be raised 21 63 -42 Government can do little to affect the circumstances of my organisation 14 72 -5810
  11. 11. Recommendations – the management challenge In February, CMI and Penna published a major study which quantified the impact that management and leadership can make. Organisations that invest effectively in management and leadership development were found to be performing 23 per cent higher across a range of measures of organisational performance3. Such margins can be the difference between success and failure. Indeed, research by the LSE/McKinsey has shown that a 20 per cent improvement in management practices is equivalent to as much as a 35 per cent increase in total capital employed4. Given the difficult conditions which continue to face managers in all sectors, as shown in this Economic Outlook, it is clear that management performance is at a premium. Yet the findings also show that employer investment in management development, like other areas of spending, is under real pressure. At the same time, the level of concern about management skills shortages is on the rise. Of course, managers are responsible for controlling costs, and that has been a priority for many managers. But employers must also look closely at where cost-effective measures are still possible to improve management capacity. The importance of investing in our human capital is clear in the recommendations emerging from this report for policy makers. Managers are making clear demands for additional support to help their investment for growth: •• Employers are continuing to seek greater control over the funding of skills development and strongly support tax breaks to support their existing investment in skills. Further funding for apprenticeships is in demand, and the new UKCES Employer Ownership Fund of £250m should be a welcome new funding opportunity to support investment in management and leadership capability •• Simplification of the tax system: a clearer and effective tax regime which supports investment is rated as more of a priority than reductions in tax •• Measures to support a reliable flow of credit and access to finance, with the evidence suggesting that this remains a problem for many companies As we have previously argued, restoring Britain’s economic health will be achieved by persistent commitment to a wide range of complementary measures: in fiscal and monetary policy, in legal structures that define corporate governance and the scope and structure of markets, in education and training, and in trade and social policies. The policy areas identified form an important part of that picture and addressing them will help managers to deliver improved performance for UK plc. It is still the case that major challenges lie ahead for the UK economy, both domestic and global in nature. There are complex policy issues to be resolved – among them, improving access to financial capital, which remains restricted. Just as importantly, managers and policy makers must look again at how we can raise UK plc’s human capital, building much-needed skills and strengthening our businesses, ready for the heavy lifting needed to restore economic growth. 3 http://www.managers.org.uk/MLDbenefits 4 http://cep.lse.ac.uk/management/Management_Matters.pdf 11
  12. 12. Chartered Management InstituteThe Chartered Management Institute is the onlychartered professional body in the UK dedicated topromoting the highest standards of managementand leadership excellence. CMI sets the standardthat others follow.As a membership organisation, CMI has beenproviding forward-thinking advice and supportto individuals and businesses for more than50 years, and continues to give managers andleaders, and the organisations they work in, thetools they need to improve their performance andmake an impact. As well as equipping individualswith the skills, knowledge and experience to beexcellent managers and leaders, CMI’s productsand services support the development ofmanagement and leadership excellence acrossboth public and private sector organisations.Through in-depth research and policy surveysof its 90,000 individual and over 800 CompanyMembers, CMI maintains its position as thepremier authority on key management andleadership issues.For more information please contactthe Policy and Research Department on:Tel: 020 7421 2721Fax: 020 7497 0463Email: research@managers.org.ukWebsite: www.managers.org.ukor write to us at the address below.Chartered Management Institute2 Savoy Court, Strand,London, WC2R 0EZRegistered charity number 1091035Incorporated by Royal CharterISBN 0-85946-408-3© Chartered Management Institute, April 2012 4488 04/12

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