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OUTLOOK:

THE FREELANCERS PERSPECTIVE

ECONOMIC

2014

FEBRUARY

INTRODUCTION
The UKs economic recovery remains on track but some disappointing data in February should serve as a reminder against complacency. Forecasters have once more rushed to upgrade growth projections, however signs that the economic recovery is slowing down should keep policy-makers on their feet. Unemployment has increased since January, while data on manufacturing and public finances were below expectations. Nevertheless, with inflation down, credit conditions easing further and business investment picking up to support growth, these issues should be seen as temporary bumps rather than major causes for concern. The UKs freelance workforce should remain optimistic as stable and more balanced growth will allow them to reap the benefits of an expanding economy. The chief obstacles for the UKs economic recovery continue to be slow productivity growth and a sluggish increase in wages. Improving productivity is vital for allowing wages to increase without generating overwhelming inflationary pressures. This is an issue that will remain crucial in future debates as analysts argue over the size of the output gap and whether the financial crisis has permanently damaged UK productivity. Freelancers, who are lauded for their high expertise and productivity levels, have an important role to play in bridging this gap.

reflecting a fall in world commodity prices, lower year on year rises in utility prices and a strong pound making imports cheaper. Inflation is projected to be kept at bay over the next few months but should rise towards the end of the year after further improvements in the labour market have taken place. UK GDP % growth forecasts for 2014

3 Growth 2 % GDP 1

2.4 %

2.4 % IMF

2.6%

2.7%

BoE

OBR

BCC

GROWTH
GDP growth forecasts have yet again been revised upwards with estimates ranging from 2.4% by the Office for Budget Responsibility (OBR) to the most optimistic prediction of 3.4% by the Bank of England (BoE). Growth has been chiefly supported by consumer spending induced by low interest rates discouraging savings. Consumer spending has now relaxed and capital expenditure is picking up to provide for a more balanced growth. Inflation has fallen to 1.9%, below the BoEs target of 2%

Key to low inflation forecasts is the large output gap which means there is still enough spare capacity in the economy to contain inflationary pressures and suppress wage increases. The large population of people in part-time work who want to work full-time also provides room for businesses to hold off on wage rises. This underlies the BoEs rationale of maintaining low interest rates until economic slack in the economy is absorbed. Much debate has surrounded the magnitude of the output gap and the extent to which the financial crisis has caused permanent damage to UK productivity. The Institute for Fiscal Studies (IFS) speculates that the severity of the crisis means that the

European Commission

Oxford Economics

2.5%

3.4%

damage to potential output is possibly towards the higher scale. However, the output gap is still likely to be very large, at 5% of potential GDP in 2013. This contrasts OBR forecasts of 2.3% and the consensus of independent forecasters of 2.9%. A large output gap means more room for the economy to grow and implies less permanent damage to UK total factor productivity. The IFS expects potential output to grow by 2.1% a year up to 2018. Although measuring the precise output gap is notoriously difficult and estimates differ widely, there appears to be agreement that there is sufficient spare capacity in the economy to sustain output growth in the coming years. Freelancers who are often recruited by businesses to improve operational efficiency and facilitate innovation, will play an important part in boosting productivity growth.

of prudent public finances for the overall health of the economy, freelancers should monitor developments in government fiscal policy with interest. Public sector net borrowing, 1996-97 to 2012-13

(Source: ONS)

PUBLIC FINANCES
Public finances worsened in January despite continuing efforts by the Government to minimise fiscal liabilities. Initial government estimates showed a surplus of 4.7bn, down from 6bn a year ago, reflecting an increase in government spending of 0.7bn. This was partially offset by a drop in government borrowing of 4bn compared to last year. It should be noted though that January is usually an outlier due to higher tax receipts, with the Government borrowing more money than it receives for most other months. Public Sector Net Borrowing, 1996-97 to 2012-13 The OBR predicts that borrowing this year will be 111bn, which is still 51bn higher than forecasted in 2010. This does not necessarily mean that targets for a budget surplus by 2018-19 are unachievable, provided that the Government continues its fiscal consolidation program as planned. The IFS contends that the level of public debt will remain substantial at 1.6 trillion or 76% of national income in 201819 and will constrain policy for at least the following decade. Considering the importance

INVESTMENT AND TRADE


The final quarter of 2013 finally saw business investment picking up after a long slump, responding to receding uncertainty, higher domestic demand and mounting confidence over the prospects of the economy. Business investment rose by 2.4% more than the previous quarter and 8.5% more than a year ago. This is an encouraging sign for a more balanced and sustainable growth as Q4 2013 also saw consumer spending slowing down to a 0.4% increase. Nevertheless, business investment has remained almost 20% below its pre-crisis peak despite relatively healthy corporate finances. Diminishing uncertainty should mean business investment will continue to increase, forecasted by the IFS to rise by at least 5.4% in 2014. Rebounding business investment should translate to more projects for contractors as companies call in freelancers to provide their high expertise and manage project risk. Most encouragingly, trade data for December

2013 showed that net trade contributed 0.4% to quarterly GDP growth against expectations. The UKs trade deficit shrank to its lowest since July 2012, compounded by a combination of rising exports and falling imports. December saw a fall of just over 2.5bn in the overall trade deficit to 1.03bn, which represents the largest monthly decline since records began in 1998. Value of UK trade in goods and services, 2012-13
2012 Q 2013 Q 2013 J u Aug Nov Sep Q2 Q2 Q4 Q4 Oct Dec
-1026

LABOUR MARKET
The labour market continues to improve although the pace of the recovery is gradually slowing down compared to previous months. Unemployment figures are up 0.1% from last month, illustrating an anticipated cooling off in the labour market. Unemployment now stands at 7.2%, down 0.4% from the last quarter and down 0.6% from a year earlier. The number of Job Seekers Allowance (JSA) claimants fell by 327,600 between January 2013 and January 2014, representing the largest annual fall since March 1998. Youth unemployment continues to fall, now at 19.9% and down 1% from the previous quarter. For October to December 2013 there were 49,000 more 16 to 24 year olds in employment and 9,000 less economically inactive youths. Involuntary part-time work remains 3.3% higher than last year but saw a big quarterly drop of 2% after consecutive spikes. We should continue to see a contraction in youth unemployment and involuntary part-time work as the labour market continues to grow in the following months. Output per worker, 2012-2013

-5111

-3197

-3735

-9925

-3269

-8728

-1000
UK Total Trade Balance ( Million)

-2000 -3000 -4000 -5000 -6000 -7000 -8000 -9000 -10000

(Source: ONS)

Worryingly this fall is almost exclusively down to a decline in imports by 4.7% compared to an increase in exports of 1.9%. This is partly due to the poor performance of the manufacturing sector, which is yet to recover from the financial crisis, with the Office of National Statistics (ONS) revising its growth estimates down to 0.7% from 0.9%. Although the OBR has predicted that the UK will run a trade deficit up until 2019, growing output levels, easing consumer spending and the slow revival of most Eurozone countries should help to further shrink the deficit. With services remaining the main driver of UK exports and evidence showing increasing demand for contractors abroad, freelancers can play their part in tackling Britains trade deficit.

-10201

-6474

-8026

-3418

-3582

-8513

-6515

Q3

Q3

101

Output per H our

100

99

100. 1 5

100. 2

100. 8

101.3

101.1

99.8

99.9 1

99.5

99.1

98.8

98.4

98.7 1 2013 Q

99.2 Q2

98

Q2

Q3

Q2

Q3

Q2

Q3

Q4

Q4

2011 Q

(Source: ONS)

2010 Q

2012 Q

Q4

Q3

98.9

100 1

On the other hand, sluggish earnings and productivity growth continue to pose the most imminent threat. While inflation is steadily declining, total earnings continue to lag behind the inflation rate for the 5th year running. Total pay rose by 1.1% for September to December 2013 but with inflation at 2%, workers still experience a significant squeeze on their incomes. According to the IFS, the average British household is 6% poorer than before the financial crisis and is highly unlikely to recover that lost ground before the 2015 general election. Key to slow wage growth is the below par performance of labour productivity where output per worker shrunk another 0.3% between Q2 and Q3 2013. This is disappointing considering that Q1 and Q2 2013 saw an increase after falls in every single quarter in 2012. Unless labour productivity picks up, declining unemployment will not necessarily translate to better wages as people work for less hours than they would like and consequently more workers are required to produce the same level of output. With the size of the output gap at the core of economic debates in the UK, improving productivity is crucial for reducing the amount of slack in the economy and allowing wages to rise. Vacancies continue to increase with the ONS reporting 580,000 job vacancies for November to January 2014, up 28,000 from previous quarter and 89,000 from a year earlier. A report by the Recruitment and Employment Confederation (REC) and KPMG shows that the growth in permanent appointments has eased but remains marked. Vacancies have been rising at the fastest pace since May 1998 as demand rises sharply and the availability of staff declines.

4.1% on the last quarter and 3.6% on last year, outstripping the growth in employees by almost 3 to 1. While employees increased by 63,000 from July to September 2013, the number of self-employed rose by 172,000 to reach 4.37 million, now representing 14.5% of the total UK workforce. Crucially, this growth is driven by the self-employed working full-time rather than part-time, rising by 4.3% compared to 1.7% for the latter. In fact, the BoE inflation report shows an almost uninterrupted increase in the share of self-employment to total employment since 2000. Self-employment share as % of total employment

(Source: Bank of England)

FREELANCING AND THE LABOUR MARKET


The biggest news from the ONS February report is the unabated rise in self-employment. The number of self-employed has increased by

This spectacular rise has finally garnered the attention of the press and placed selfemployment at the centre of economic debates. Some argue that the rise in selfemployment is tied to the increase in involuntary part-time work and is thus part of the problematic nexus of low productivity and low wages. In our view, the persistence of self-employment in the recovery points to a structural change in the UK labour market rather than a cyclical reaction to the financial meltdown. In the past, increases in self-employment were linked to depressed employment opportunities during economic downturns which then reversed in times of recovery. Now however, self-employment has played a key role in augmenting unemployment during the recovery as much as during the crisis.

This shows that self-employment is persistent and possibly a manifestation of changing working patterns and growing flexibility in the UK labour market. With low productivity for the self-employed measured in terms of working less than 30 hours per week, increasing demand and easing credit conditions should mean that the self-employed will soon be better situated to up their game. Freelancers, a sub-set of the self-employed, stand at the higher-end of the self-employment scale in terms of skills and productivity and have already seen their demand and rates increase substantially. Indeed, the REC/KPMG report shows that temporary billings rose in January at a rate only marginally slower that Decembers 15year high, reflecting increased activity levels at clients. Demand rose for all nine types of contract staff on record, with engineering, an industry abundant with freelancers, topping the table. Finally, with rising demand for and declining availability of contract workers, hourly rates of pay for contractors continued to rise in January.

the economy grows, people will work more hours and move away from lower to higher productivity jobs. This should occur over the relatively short-term considering the pace of economic growth and allow wages to increase in tandem. The slowdown in the labour market is to be expected and despite January being a poor month for public finances, the economy seems to remain on the right track towards full recovery. Policies announced in the Budget on March 19th should solidify confidence in the economy and provide the necessary signals for businesses to continue to invest. Dangers are still lurking however, especially with regards to the Scottish referendum set to take place in September, with Chancellor George Osborne and BoE Governor Mark Carney both clarifying in February that a currency union between the UK and an independent Scotland is off the table. The BoE will also need to monitor the economic situation carefully in order to pick the right moment to hike interest rates, although it would be surprising if this occured before the spring of 2015. Tensions in emerging economies and the requirement for further adjustment in the Eurozone could pose additional risks for UK growth. Nevertheless, freelancers should eye the economy with confidence and expect that steady growth, albeit at a slower pace, will continue to support demand for their services.

VERDICT
The UKs macroeconomic outlook continues to appear encouraging with most politicians, analysts and businesses articulating their optimism over the future direction of the British economy. This overarching positive sentiment is rubbing off on businesses who have started to invest, contributing to a more balanced and sustainable growth than the consumer-led recovery observed in previous months. Falling inflation, a shrinking trade deficit and mounting business investment should be welcome news for freelancers in the months to come. Persisting problems in the face of low productivity and stagnating wages are particularly worrying but their resurgence is bound to materialise; the question is how fast? While the drop in labour productivity has been puzzling commentators given strong employment growth, indications are that as

Written by Georgios Nikolaidis Economic Policy Adviser, PCG

ABOUT PCG
PCG, the voice of freelancing, is the cross sector association for freelancers, contractors and consultants in the UK, providing its members with knowledge, representation, community and insurance. With around 21,000 members, PCG is the largest association of independent professionals in the EU. It is PCGs fundamental belief that flexibility in the labour market is the key to ensuring Britains future economic success.

CONTACT PCG
Heron House 10 Dean Farrar Street London SW1H 0DX T: +44 (0)208 897 9970 W: www.pcg.org.uk

Professional Contractors Group Ltd. Feb 2014 Registered in England and Wales, number 03770926, registered at 35 Ballards Lane, London N3 1XW. This guide is not intended to constitute legal or professional advice, and neither PCG nor the documents authors accept any liability for any action or inaction taken on the basis of this document. This document is intended for general guidance and information purposes only. It has been prepared in good faith and represents PCGs own interpretation of the law; reasonable efforts have been made to ensure accuracy. Whilst this document has been prepared with the help of legal advice and research, its content is of its nature generalised and it is no substitute for specific legal advice. Individual circumstances will always vary, and specialist professional or legal advice should be sought where required.

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