Analysis of the Q1 Bellwether Report

Chris Williamson, chief economist at Markit and author of the IPA/BDO Bellwether Report – the quarterly survey of marketing expenditure – gives his take on the latest findings published last week, and on the economic outlook in general.

Looking back on the financial crisis, we can now see that economic impact was greatest in late-2008 and early 2009 – the six months that followed the collapse of Lehman’s. In the first quarter of 2009 alone, the economy shrank 2.5%. However, official data have finally caught up with the business surveys, such as the CIPS/Markit Purchasing Managers’ Index, in signalling that the recession ended late last year. But not before almost 6% of output was lost over the course of the recession, the largest decline since the Second World War.

Having finally emerged from recession, the big question now is whether the UK faces a ‘double dip’, whereby the economy slides back into contraction. This is not on the cards, according to forecasts from City economists, the average of which puts UK economic growth at 1.2% this year and 2.0% in 2011. However, with the reputation of economic forecasters in tatters following the failure to predict the severity of the downturn and subsequent recovery, it’s fair to suggest that anything might happen, and many analysts worry that a renewed weakening of the economy is a distinct possibility, especially given the inevitable prospect of government spending cuts following the general election in May.

To avoid a double-dip recession, business spending needs to pick up, with firms taking on more staff and investing in expansion to counteract the impact of tighter public purse strings later this year and in 2011.

So the news from the IPA/BDO Bellwether survey that companies revised up their marketing budgets in the first quarter for the first time since 2007 provides some reassurance that the recovery scenario remains plausible. The survey suggests that UK businesses are indeed moving away from the cost-cutting mentality that characterised the recession, and are at last starting to raise their expenditure on activities such as marketing in response to the better economic environment.

This is particularly encouraging because higher marketing spend tends to be followed by increased business investment in general, as well as rising employment, as it is closely linked to corporate profitability.

In truth, the upturn in marketing spend has taken longer than might have been expected. After all, the Bellwether survey found that companies reported that their financial prospects began improving back in the second quarter of last year. But the severity of the recession and the associated focus on strict cost control appears to have held back a return to growth of non-essential expenditures. The misleading weakness of initial official economic growth estimates (gross domestic product was initially estimated to have risen by just 0.1% in the final quarter of last year; a figure which has since been revised up to 0.4%) is likely to have added to a general reluctance among companies to become more confident about trading prospects.

However, the flow of good news on the economy is becoming more convincing, and pessimistic forecasts – such as the well-publicised view that unemployment would hit three million – are looking increasingly wide of the mark. It’s interesting to also see that the Advertising Association has revised up its own forecasts for UK advertising expenditure. The AA has recently changed its forecast of a 1.1% decline in adspend in 2010 after allowing for inflation to a flat picture.

One caveat to the Bellwether findings is that the upturn in spend in Q1 was limited to media advertising, growth of which can be at least in part explained by advertisers taking advantage of historically cheap TV advertising rates as well as the inclusion of internet advertising in this category.

In contrast, the ‘all other’ category of spend in the Bellwether survey saw expenditure fall again in Q1. The ongoing weakness of this category suggests a continued reticence among companies to increase their commitments to below-the-line activities, such as PR, research and conferences, as this often entails a longer-term cost exposure (for example through the recruitment of more staff).

So, while the Bellwether brings good news that companies are finally matching improved financial prospects, higher sales and improved profits with increased advertising spend, expenditure on other activities where there is perhaps not a price incentive, or where significant investment in employment and other resources is required, is not yet showing similar growth. But we are moving in the right direction, and the latest survey points to a reduced risk of a double-dip recession.

The latest IPA/BDO Bellwether Report (Q1 2010) was published on Monday 19th April 2010 and revealed that marketing budgets were revised up for the first time since Q3 2007. To subscribe to the report contact sophie.jarvis@markit.com or on: 020 7260 2487.