UK: Deloitte Monday Briefing: Six Indicators To Watch In 2014

Last Updated: 22 January 2014
Article by Ian Stewart

Most Read Contributor in UK, August 2017
  • The mood at this week's gathering of policymakers, politicians and business leaders at Davos is likely to be upbeat. The consensus view today is that the world economy is set for recovery in 2014 driven by a revival in the industrialised world and emerging markets.
  • Economists expect the US economy to expand by 2.8% this year, up from 1.9% in 2013. A two-year contraction in the economy of the euro area is coming to an end and the region is expected to return to growth this year. Activity in emerging markets faltered last year but should reaccelerate in 2014. Perhaps the most rapid turnaround in fortunes has been seen in the UK. Economists think the UK will be Europe's fastest growing major economy in 2014, posting growth of 2.6%, the fastest rate in seven years.
  • That sounds quite good. But, as the last six years amply demonstrate, economists' forecasts are often wrong. Here are six indicators we will be watching in 2014 to see whether the recovery is on track, both in the UK, and globally.
  • The UK's experience of recession can be summed up by three indicators – capital spending, growth in real earnings and productivity growth. These three indicators also hold the key to the UK's recovery.
  • Capital spending collapsed across the world during the recession. In the UK, investment dropped by 26% in 2008/09 and has subsequently stagnated. In normal times investment accounts for roughly 20% of GDP and shrinking capital spending has directly dampened growth as well as weakening the productive capacity of the economy. Policymakers are banking on a strong recovery in UK capital spending this year. Without it the UK will struggle to raise its long term growth rate or to deliver more balanced growth. UK capital spending data warrant close attention this year.
  • The recession has also severely damaged the spending power of UK consumers. Rather than being driven by mass unemployment, as in previous recessions, spending power was squeezed by high inflation and weak wage growth. Ironically the UK recovery has, so far, been led by consumer activity, with consumers dipping into savings, borrowing more and spending windfall gains from payment protection insurance compensation to boost consumption. These factors are not sustainable. What consumers need is lower inflation and higher earnings in 2014. Watch these numbers to see whether things are getting better for UK consumers.
  • Over the last six years, the UK economy has shrunk. Yet the number of people in work has risen. More people producing less means that output per head, or productivity, has fallen. In the long term, productivity growth is the key determinant of growth and living standards. Any permanent decline in productivity would have profound consequences for the UK. Our hunch is that the damage is not permanent and productivity will start to recover in 2014. If it doesn't, pessimism about long term prospects for the UK will mount.
  • Last month America's Federal Reserve announced it would start to ratchet back its programme of Quantitative Easing from January. This process of "tapering" marks the first step towards a tightening of US monetary policy and represents a potential threat to the global recovery that has been fuelled by America's cheap money policies. Last year even talk of tapering was enough to hit equities and stoke worries about growth in the emerging markets. The central challenge for the Federal Reserve this year will be to ease back US monetary stimulus without hitting business confidence. We will be gauging changes in Fed policy by their effects on risk appetite among UK Chief Financial Officers as measured in the Deloitte CFO Survey. If Fed tightening were to dent risk appetite among large, multinationals operating out of the UK we would expect to see similar effects in other countries. That would be a big negative for the global recovery.
  • The world looks a less risky place at the start of 2014 than it did at the start of 2012, in large part because the euro is on a firmer footing. What turned the tide was the promise, made by the European Central Bank in September 2012, to buy the bonds of at-risk countries without limit. But the process of agreeing the rules and creating the institutions of a more durable monetary union will take years, not months. With 18 member states the euro area experiences an average of four national elections a year. Thus there is a continuing possibility of some unforeseen electoral shift in individual member states which creates new uncertainties for the euro. Holders of government bonds in so-called peripheral nations like Greece and Ireland made handsome profits in 2013 as the perceived risk of breakup reduced. Yields on government bonds in the euro area will give vital evidence this year as to whether the region's recovery is on track.
  • Despite the rise of the emerging market nations, America remains the world's largest economic power. Its economic performance matters for the rest of the world. America saw a shorter, milder recession than Europe and has enjoyed continued, if unspectacular growth in every quarter since late 2009 with the exception of a slight dip in early 2011. A marked acceleration in America's growth rate this year is an important part of a wider global recovery story. Our sixth and final indicator is the US Institute for Supply Management's Purchasing Managers Index. It gives a timely and authoritative picture of what is happening in America's manufacturing sector. We will be watching it closely in 2014 for confirmation that the pace of America's recovery is accelerating.
  • The signs for the global economy are positive. But the actual path of the economic cycle is more erratic and unpredictable than the stylised cycles beloved of economists. Recovery seems to be coming. What is certain is that it will not wholly conform to current expectations.


UK's FTSE 100 ended the week up 1.1%.

Here are some recent news stories that caught our eye as reflecting key economic themes:


  • UK inflation fell to 2% in December, hitting the Bank of England's target for the first time in 4 years
  • The FT reports that the global car industry is spending more on research and development than ever before, driven by strong industry competition
  • Japan machinery orders – a leading indicator of business investment – hit a 5-year high in November, registering their fifth biggest rise on record
  • Ratings agency Moody's raised its rating on Ireland from "junk" to investment grade, changing its outlook on the economy from stable to positive
  • Survey data shows that spending by China's high net worth individuals fell by 15% last year, possibly due to the government's clamp-down on lavish spending by officials
  • US mortgage-provider Fannie Mae warned that weakening demand from institutional investors could lead to a fall in US house prices
  • Eurozone industrial production rose by a faster-than-expected 1.8% in November
  • French president François Hollande outlined a €30bn payroll tax cut for French companies in a bid to revitalise Europe's second-largest economy
  • The FT reports that US banks shrank their holdings of government-guaranteed "safe securities" by more than 3% last year, in a shift to riskier assets
  • UK retail sales grew by a faster-than-expected 5.3% in December, the fastest pace in 9 years
  • English farmland prices rose by 11% to a record £6,882 per acre last year – almost outperforming gold
  • UK housebuilder Barratt Developments reported a 71% rise in the number of homes reserved by buyers in the second half of 2013
  • Hong Kong gambling magnate Lui Che-woo moved into second position on the Asia rich list, according to the Bloomberg billionaires index
  • Online retailer Asos announced strong total sales of £335.7m in the 4 months to December, with sales up 38%
  • Google is to buy Nest Labs, a manufacturer of smart thermostat and fire detectors, for $3.2bn
  • A rise in the value of Norway's sovereign wealth fund means that everyone in Norway is a theoretical crown millionaire, thanks to high oil and gas prices
  • Fleur Estelle Belly Dance School has been ordered to pay more than £50,000 in tax, after a judge ruled that its lessons are "recreational" and not a "serious and systematic course of study" that warrants VAT exemption – dance-floored

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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