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Economic Outlook Autumn 2012


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Economic Outlook Autumn 2012

  1. 1. Economic OutlookIssue 7 – October 2012Patrick Woodman
  2. 2. Introduction The Economic Outlook research series provides a six-monthly snapshot of managers’ views on the economy and the prospects facing their organisations. Making use of tracking data collected over the last four years, the research series provides regular insights on the state of the economy and the impact it is having on UK organisations. It reviews managers’ expectations of future economic performance and the actions they are taking to steer their organisations through the challenges they face. It also assesses support for a range of public policy measures in order to gauge what policies professional managers would like to see implemented to help their organisations succeed. Methodology The latest Economic Outlook survey was conducted between 31 August and 13 September 2012. A sample of 15,000 members was invited to complete the survey online with a total of 510 responses received from across the UK economy, including a range of industry sectors and managers at different seniority levels up to directors and chief executives. The response rate was lower than previous editions of the survey, but it is not clear why this may have been the case. 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 Patrick Woodman at CMI. The work of Paul Hutchings in particular is gratefully acknowledged. CMI is also grateful to all members who completed the survey and continue to support CMI’s research programme. 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 0-85946-448-22
  3. 3. Foreword We have enjoyed a unique summer in the UK this year. Sporting excellence took centre stage, underpinned by organisational and managerial brilliance in the preparation and delivery of the London 2012 Games. Who could disagree that they were the best Olympic and Paralympic Games ever? But now, it’s back down to earth with a bump. The findings of our latest Economic Outlook, presented here, paint a picture of difficult economic circumstances for many businesses. On the whole, managers are less optimistic about their companies’ prospects now than they were six months ago. Big majorities, across all sectors, report that the state of the economy is damaging their organisation. The effects of this on our companies and our people are visible in these results. Most managers report that employer spending is still being reined in. They are tasked with controlling costs and leading their teams through change, in the middle of what amounts to a prolonged crisis in employee engagement and morale. Meeting these challenges is no mean feat. Only the best managers will be able to do so. That’s why I believe professional qualifications and standards, including Chartered Manager, have such an important role to play in our recovery, even when many employers have cut budgets for staff development. The direction of the economy is, of course, an area of intense political debate. It’s now over two years since the Coalition Government was formed with an explicit commitment to stabilising the economy and securing growth. This survey shows that many managers have doubts about the Government’s present economic strategy and large numbers do not expect economic recovery until next year, if not later. We have a serious deficit of management confidence. Of course, the difficult question is how to rebuild confidence. In the absence of ‘game changing’ policy, businesses face a long, slow road back to economic health. Professional managers will have to capture a little of the magic we shared this summer to keep us on track. Ann Francke Chief Executive, Chartered Management Institute 3
  4. 4. Summary of findings The UK economy •• Impact of the current state of the economy – 77 per cent of private sector managers report that the current state of the economy is having a negative impact on their organisation. So too do 95 per cent of public sector managers and 90 per cent of those in the not-for-profit sector. The overall number, 84 per cent, has held steadily above 80 per cent since March 2009. •• Economic growth over the next 12 months – managers are pessimistic about the direction of a number of key macro-economic indicators. Only nine per cent expect GDP growth over the next 12 months while 52 per cent expect consumer spending to fall. Seventy-two per cent expect business insolvency to rise. UK organisations •• Falling employer optimism about the next six months – the net optimism score among private sector managers has dropped by 13 points over the last six months, from +11 to -2. The public sector outlook remains deeply pessimistic at -40. •• Employer investment – marketing, business development/sales and IT are the only categories where spending is more commonly expected to rise than fall over the next six months. Overall, 33 per cent expect cuts in spending on training and development and the same number expect cuts in management and leadership development specifically, despite skills shortages being ranked as the third most common concern for the next six months. •• Focusing on costs – it remains the case that managers have had a strong focus on controlling costs over the last six months. However, 35 per cent of private sector managers report that they have introduced new products or services in reaction to the continued tough climate. •• Availability of finance – just 7 per cent report that the availability of finance has improved over the last six months. •• Damaging economic factors – the cost of energy remains the most common concern for the next six months, with 65 per cent anticipating that it will have a detrimental impact on their organisation over the next six months. The level of government debt remains the second most common barrier to growth, followed by management skills shortages. UK managers •• Job security – 44 per cent of managers report that they feel insecure in their current job. It is markedly higher among women (61 per cent insecure, compared to 40 per cent of men). It is highest in the public sector at 56 per cent (four points lower than six months ago), compared to 35 per cent in the private sector. •• Morale – employee morale continues to suffer: 86 per cent of public sector managers report that it has fallen over the last six months, compared to 47 per cent in the private sector. Policy measures •• Pace of deficit reduction – unsurprisingly, opinion is deeply divided over the controversial question of how quickly the deficit should be reduced. Forty-one per cent of managers in the private sector feel current measures are not going fast enough, while in contrast, 49 per cent of those in the public sector managers feel it is moving too quickly. •• Low confidence in economic strategy – overall, 63 per cent of respondents say they have little or no confidence in the present economic strategy. There are not such clear sector differences as might be assumed: this position is held by 59 per cent in the private sector.4
  5. 5. •• Role of government – 69 per cent reject the suggestion that government can do little to affect their organisation’s circumstances. Top of the list is simplification of the tax system, backed by 89 per cent, followed by tax breaks for investment in skills (85 per cent) – the two options which have consistently topped our questions on this subject. On the subject of skills, 70 per cent back moves to give employers more influence over public investment in skills.Commentary on findingsThe UK economy Five years after the sub-prime mortgage crisis hit the UK with the failure of Northern Rock – and four years after Lehman Brother’s dramatic collapse – the UK economy remains in recession. Eighty-four per cent of the managers surveyed report that the economy is having a negative impact on their organisation, a number that has barely changed since six months ago (83 per cent) and has not dipped below 80 per cent since March 2009. Only five per cent report a positive impact. Significantly negative impact Slightly negative impact -44 -40 12 41 No impact Slightly positive impact Negative % Positive % Significantly positive impact Figure 1 Impact of economy on organisation Ninety-five per cent of managers in the public sector report a negative or significantly negative impact, along with 90 per cent in the not-for-profit sector. Managers from the private sector fare only slightly better, with 77 per cent reporting a negative impact: just 7 per cent in this sector report that the economy is having a positive impact. Economic The economic contraction of 0.4 per cent in the second quarter of 20121 left the UK as indicators one of only two G20 nations in recession.2 A new question in this survey asked managers when they think the economy will return to growth. Respondents were overwhelmingly downbeat, with 46 per cent suggesting it will not be until after June 2013 and only 7 per cent suggesting growth will return this or the next quarter. Whatever transpires when the latest official figures are published – and some have suggested that growth has returned this quarter – these figures strongly suggest that managers lack confidence in the prospects for significant and sustainable recovery. Three-quarters of manager expect employment levels to stagnate or decrease over the next twelve months whilst 72 per cent expect an increase in business insolvencies. Sixty-three per cent expect household debt to grow whilst 65 per cent expect Government debt to also increase. 1 Office for National Statistics. Statistical Bulletin: Quarterly National Accounts, Q2 2012. 5 2 The other country is Italy.
  6. 6. 60% 50% 46 40% 30% 20% 18 14 15 10% 6 1 0% This quarter Next quarter 4th quarter 1st quarter After June Don’t know (June to (October to 2012/13 2013/14 2013 September December (January to (April to 2012) 2012) March 2013) June 2013) Figure 2 When will the UK economy come out of its current recession? Management Reversing the trend of modest improvements seen in the last four CMI Economic Outlook optimism reports, the findings across all respondents show a decline in the net level of optimism over the next six months, from -4 to -14. Managers in the public sector continue to record very low scores (-40 net). Perhaps more strikingly, private sector optimism has dropped into negative territory, down 13 points from +11 six months ago to -2. The not-for-profit sector is the only sector recording a positive net optimism score but this remains low at +3. % net optimism 30% 20% 10% 0% Private sector -10% Public sector -20% Not for profit sector -30% -40% -50% Sept ’08 March ’09 Sept ’09 March ’10 Sept ’10 March ’11 Sept ’11 March ’12 Sept ’12 Figure 3 Net management optimism about prospects for the next six months, by sector Managers remain more optimistic when asked about their long term prospects, a trend that has been consistent since our first survey. For example, the net optimism level of -2 for the next six months among private sector managers is transformed to +48 when thinking about prospects over the next three years. Unfortunately, looking back over the results since 2009, such optimism about the long term has not been realised in the form of improvements in economic performance as time has passed. It is also striking that public sector “optimism” remains barely improved over the same time frame, only rising from -40 to -23. The long-term implications of austerity are evidently well-understood.6
  7. 7. Factors affecting Among a range of factors which may damage or assist organisations, the cost of energy growth remains the most widely feared barrier to growth, with 65 per cent expecting it to have a negative impact on their organisation over the next six months. The level of Government debt remains the second most significant barrier (53 per cent), a large proportion of which is from those in the public sector. Shortages of management skills remain the third most common concern, a factor that is particularly concerning given the current state of the job market. Interestingly, access to finance is rated relatively lowly; even among SMEs, only 30 per cent of managers anticipate that it will be a problem, although evidently it can be a ‘make or break’ issue for companies which find themselves struggling with cash flow or hampered in their efforts to grow. 80% 70% 60% Cost of energy Levels of 50% Government debt Management skills shortages Pension liabilities 40% Employment disputes Levels of 30% personal debt Labour shortages Changes in value 20% of the pound Availability of credit Reducing carbon 10% emissions 0% March ’09 Sept ’09 March ’10 Sept ’10 March ’11 Sept ’11 March ’12 Sept ’12 Figure 4 Factors impacting on business over the next six months: per cent damaging impact On the subject of access to finance, the survey again asked about the availability of finance, both for short term needs and long term investments. The findings remain a cause for concern, with substantial numbers reporting that it has worsened both for short and long term needs (38 and 42 per cent respectively). Only 7 per cent of managers report better access to credit for either long term or short term needs. There has been no dramatic change in these numbers over the last three years. 7
  8. 8. Impact of summer A new, one-off question was added to the survey to provide some insight into the specific 2012 events events enjoyed by the UK over recent months, specifically the Jubilee and the London 2012 Games. After a particularly wet summer across the UK, we also asked about the impact of the weather, and, for comparison, the effects of the Eurozone crisis, which has continued to develop over the same period. In all four cases, the majority replied that there had been no impact on their organisation. The Eurozone crisis was by far the most damaging (followed by the weather), while the London 2012 Games were seen as most beneficial. It is perhaps cheering that 3 per cent could report benefit from the summer weather (interestingly, this small band included a number from the police). In London, 29 per cent reported benefits from the Games – although even here, 53 per cent reported that it had no impact. Damaging No Impact Beneficial Beneficial Impact Impact Impact – London % % % % London 2012 Games 11 73 16 29 Jubilee celebrations 8 82 9 14 The weather 22 75 3 0 Eurozone Crisis 41 59 1 3 Table 1 Impact of specific events on organisational performance Employer The Economic Outlook report of a year ago noted that expectations of employer investment and investment decisions had, in general, fallen since the beginning of the series in 2008. cost cutting The latest data shows that expectations remain low. In eight of 11 categories, as shown in Table 2, managers believe that budgets will decrease over the next six months. Only budgets for marketing, business development and IT spending are expected to see increases in investment. Spending on management consultancy, recruitment and training and development look most at threat. Sept ’08 Mar ’09 Sept ’09 Mar ’10 Sept ’10 Mar ’11 Sept ’11 Mar ’12 Sept ’12 Business development/sales 38 12 14 21 14 7 7 16 20 Marketing 31 7 8 16 1 1 6 8 13 IT 16 -17 -10 -4 -16 -14 -9 -1 3 Corporate social responsibility 6 -9 -11 -6 -16 -14 -13 -9 -6 Employee pay n/a -12 -10 -1 -18 -24 -18 -13 -7 Product research and development 11 -14 -14 -8 -17 -14 -12 -9 -11 Management and leadership development n/a -22 -14 -10 -19 -22 -19 -13 -14 Training and development 13 -21 -16 -13 -23 -24 -23 -14 -14 Plant and machinery -11 -26 -28 -21 -24 -26 -25 -17 -21 Recruitment -19 -38 -30 -22 -37 -37 -33 -23 -23 Management consultancy -20 -30 -29 -23 -34 -33 -29 -26 -25 Table 2 Net investment expectations over the next six months8
  9. 9. The latest survey asked a new question to assess the business plans of those beingsurveyed, as an indicator of management’s ambition and thus the relative health of thesector. The results, indicating whether organisations are planning for growth, for stability,or for decline, show that only 45 per cent of the private sector feel able to plan for growth.In the public sector, 53 per cent are planning for decline, reflecting the effects of austerity.The survey data also shows that cutting and controlling costs continues to be a major priorityfor many managers: 43 per cent in the private sector report having reduced overheads inthe last six months (albeit a little down from 56 per cent six months ago), as do 36 per centin the public sector. The evidence of change in the public sector as it adapts to spendingcuts continues to be prominent. Staff costs again appear to have been a significant areafor reductions in the last six months, with high rates of redundancies (both voluntary andcompulsory). Overall 25 41 34 Growth Private sector 15 40 45 Stability Decline Not for profit sector 13 58 29 Public sector 53 38 10 Negative % Positive %Figure 5 Expectations of current business plan for next 12 months 90% 82 80% 77 70% 68 60% 50% 48 Private sector 41 40% Not for profit sector 35 35 29 30 Public sector 30% 25 18 21 20 20 20% 17 10% 0% Introduced new Frozen Compulsory Voluntary Recruitment products/services pay levels redundancies redundancies freezeFigure 6 Organisational responses to the current economic conditions in the last six months by sector (selectedmeasures) 9
  10. 10. Policy debates The survey has long examined managers’ attitudes to the pace of the government’s measures and measures to cut the public deficit. The latest survey finds the highest numbers yet concluding that the pace is not quick enough – a notable change in perceptions since 18 months ago. Spring 2011 Autumn 2011 Spring 2012 Autumn 2012 % % % % Not quickly enough 11 25 24 34 At about the right pace 40 39 43 34 Too quickly 48 36 32 33 Table 3 Attitudes to the pace of measures to cut the public spending deficit, over time Perhaps unsurprisingly, given that public sector managers will be experiencing the effects of political decisions on spending, there are big differences in the responses from different sectors to this question. Not quickly About the Too enough right pace quickly % % % Private 41 35 24 Public 21 30 49 Voluntary 24 36 40 Table 4 Attitudes to the pace of measures to cut the public spending deficit, by sector Eighty nine per cent of public sector managers report that the austerity programme is having a damaging impact on their employer – but so too do 47 per cent of those in the private sector and 61 per cent in the voluntary sector. 89 90% 80% 70% 61 60% 52 50% 47 Private 40% 37 Public Voluntary 30% 20% 11 10% 2 1 2 0% Damaging No effect Beneficial Figure 7 What impact is the Government’s austerity programme having on your employer10
  11. 11. Confidence in Important though the drive to reduce the deficit has been to the Coalition, economic policyeconomic strategy is far from exclusively about public spending. Over two years into the Coalition Government, this survey asked a new, related, question to judge managers’ confidence in the current economic strategy. Only 2 per cent express a high level of confidence; 36 per cent express a moderate level of confidence. However, 44 per cent overall hold little confidence, while 19 per cent say they have no confidence at all. Although there are some differences between respondents working in different sectors, the differences are not as pronounced as might be expected: worryingly, 59 per cent of private sector managers have little or no confidence in the current strategy. 60% 51 50% 43 40 40% 35 31 Private 30% 27 23 Public 20 20% 16 Voluntary 10% 1 2 4 0% No confidence Little confidence Moderate confidence High confidence Figure 8 Confidence in Government’s current economic policy Government As in previous editions, simplification of the tax system is the most popular of a range of policy potential policies consulted on through the survey, backed by 89 per cent. Tax breaks for employer investment in skills development also remains a real priority, backed in this latest survey by 85 per cent, while 70 per cent back increasing employer control over skills investment, a key plank of the Government’s skills policy. Amid widespread debate over how youth unemployment can be cut, it is interesting to note the strong support for increased funding for Apprenticeships (81 per cent support) – and the strong opposition to any move to cut the National Minimum Wage for young people (70 per cent). 11
  12. 12. Disagree Agree Net level of support % % September 2012 % The tax system should be simplified 2 89 87 Government should provide tax breaks for employer investment in skills development 3 85 82 Government should strengthen measures to improve bank lending to businesses as a matter of urgency 4 86 82 Government funding for apprenticeships should be increased 6 81 75 Regulation of the financial sector should be tightened 7 77 70 Government should direct investment towards transport infrastructure 7 73 66 Employers and learners should be given greater control over funding for skills development 7 70 63 Measures to reduce business regulation should be accelerated 12 66 54 Government should take a more active role in providing finance to business 17 68 51 Interest rates should be held at current levels 16 66 50 Introduce a moratorium on new regulations affecting small businesses 10 57 47 Business taxes should be cut 15 55 40 Government should reform planning laws 18 46 28 Government should direct investment towards green infrastructure 22 45 23 Offering unpaid work placement schemes to unemployed young people 32 46 14 Replacing the current fair dismissal rules to make it easier to dismiss staff 37 40 3 Visa laws should be relaxed to support businesses in the recruitment of international talent 47 22 -25 Public spending should be cut further 56 29 -27 Interest rates should be raised 62 16 -46 Government can do little to affect the circumstances of my organisation 69 15 -54 Reducing the minimum wage for young people 70 11 -59 Table 5 Net level of support for possible economic policy measures Morale and job The survey continues to suggest that employee morale is suffering in the midst of the security continued economic pressure, cost-cutting measures and organisational change. By a long way, the worst-affected sector is the public sector, where 86 per cent report that morale has fallen: however, 47 per cent in the private sector also report a worsening position in the last six months. Overall 23 35 32 10 1 Much worse Private sector 14 33 40 11 1 Slightly worse Neither worse nor better Not for profit sector 10 31 45 14 Slightly better Much better Public sector 46 40 10 4 Negative % Positive % Figure 9 Change in employee morale over the past six months12
  13. 13. Given the overall picture, it is no surprise that many managers perceive their jobs asinsecure – overall, 44 per cent describe themselves as insecure or very insecure in theircurrent roles – or that sector differences persist (see page 4). However there are alsosizeable differences between men and women’s perceptions, as Figure 10 below shows. 60% 50 50% 47 44 40% 33 Male 30 30% 27 Female 20% 17 Overall 13 14 10% 10 9 6 0% Very insecure Insecure Secure Very secureFigure 10 Job security by gender 13
  14. 14. Recommendations – the management challenge One of the clearest themes to emerge from this edition of the Economic Outlook is the question of managers’ confidence. At a macro-economic level, many managers lack confidence about the overall direction of the government’s economic strategy. It is also in short supply when it comes to managers’ views on their prospects for the months ahead, where overall optimism levels are lower than they were this Spring. With UK companies known to be sitting on unprecedented cash reserves, holding back from investment because of concern about the economy, it is clear that confidence is something with real implications for future performance. Rebuilding such confidence is far from straightforward. Much will rely, clearly, on macro- economic factors such as consumer spending or on government policy. One area that is less often discussed is the question of professional development: as it happens, confidence also emerged as a strong theme in two of CMI’s previous reports this year, Professionalising Management: the impact of Chartered Manager, and The Value of Management and Leadership Qualifications.3 They found that increased confidence and self-awareness were two of the most important effects of taking management qualifications or achieving Chartership. Separate research also found that organisations which invest effectively in management and leadership development were performing 23 per cent higher across a range of measures,4 a finding which really should help to inspire confidence. Management development clearly needs to be part of the answer to the crisis of confidence affecting UK organisations. CMI also recommends that policy makers take account of the wider concerns and policy preferences raised in the Economic Outlook. The priority areas include the following: •• 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. Measures such as the Employer Ownership Fund and Growth and Innovation Fund, which give employers control of skills funding, should be welcome, and there is also a desire for further funding for Apprenticeships. •• Simplification of the tax system: a clearer and effective tax regime which supports investment is rated as a more of a priority than reductions in tax. •• It still appears that measures to improve access to finance are urgently needed. 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. These actions to create a more business-friendly environment will help to rebuild confidence – but highly skilled and professional managers will need to play a critical role. 3 Both available via 4 McBain et al (2012), The Business Benefits of Management and Leadership Development,
  15. 15. 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: write to us at the address below.Chartered Management Institute2 Savoy Court, Strand,London, WC2R 0EZRegistered charity number 1091035Incorporated by Royal CharterISBN 0-85946-448-2© Chartered Management Institute, October 2012 4625 10/12