Economics in business

Rethinking government in the ‘new normal’ economy

By Andrew Sentance, Senior Economic Adviser, PwC

Public spending is under pressure. Across the western world, and especially in Europe, governments are struggling to contain high levels of public spending and borrowing. According to the OECD, the UK government spent 49% of GDP in 2012, and across the euro area public spending totalled 49.4% of GDP. Demographic pressures and rising expectations of the level of provision in key areas like education and health are making the challenge of managing government spending and public services even more difficult.

In the case of the UK, the impact of disappointing growth on tax receipts now means that public borrowing is forecast to be £108bn in the last year of this Parliament – around 6% of GDP. This is around three times the forecast for government borrowing originally set out in the 2010 Budget when the Coalition Government launched its deficit reduction programme.

This is the background to the 2013 Spending Review, the results of which are due to be announced in the summer.

There is no easy way out through a strong rebound in economic growth or tax-raising. Most western economies have seen a slowdown in economic growth associated with the post-financial crisis ‘new normal’ world. And in an increasingly globalised world economy, raising taxes is not a solution either. Higher taxes on the income of companies and individuals will undermine competitiveness, and encourage economic activity to relocate.  And higher taxes on consumers will intensify the squeeze that households are already feeling as a result of rising energy and food prices.

That leaves governments with only one option: reducing the burden of government expenditure. But how might this be achieved, in a world where demographic trends and public expectations are pushing in the opposite direction?

In the UK, we have already deployed some of the more obvious measures in the 80s and 90s – such as the privatisation and restructuring of state-owned industries. These policies were important contributors to deficit reduction in those decades. But new ideas will be needed to rethink and reshape government to meet the challenges of the 21^st Century.

There is unlikely to be a single obvious and easy solution.  The public sector in a mature western economy like the UK is a large and complex legacy business, which has been accumulating and developing its activities since the beginning of the 20^th Century.

 To meet the challenges of the 21^st Century, there is likely to be a need to  consider more radical options. First, government may need to withdraw from the provision of some public services altogether – leaving these to be provided by the private sector. Second, benefit and public service entitlements which are available for the better off members of society might have  to be withdrawn so that public funds can be focused on the more needy. Third, government needs to improve its delivery model, so that public services are provided much more efficiently and effectively to those who need them.

This is a massive agenda for public sector restructuring and reform. But the benefit of embracing it is that government is freed up to deploy resources to invest for the future – in skills, technology and infrastructure. Governments which are encumbered by high debts and deficits do not have the flexibility to do this, as Britain found out to its peril in the late 70s and early 80s.

In the UK, we have probably only scratched the surface so far in terms of radical reform of the public sector. The 2013 Spending Review will give an indication of the government’s appetite for radical change. Or it might suggest that it is deferring difficult decisions until the next Parliament.

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Andrew Sentance:
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Why are bond markets disregarding credit ratings?

by Milos Bartosek and Robert Vaughan

There is a puzzle in the bond markets. Despite a number of credit ratings downgrades – most recently for the UK’s triple A rating – this does not seem to have pushed up the country risk premium for the downgraded country. What is going on?

Investor sentiment

The usual market logic is that bond yields rise as a consequence of a credit rating downgrade to compensate for the increased risk. However, this relationship has recently seemed to break down.  As Figure 1 shows, bond yields actually fell in the subsequent four months after the downgrades of the US, UK[1], and France, a result out of line with traditional finance theory.

But why would investors buy these bonds when they are not being rewarded for the supposed increase in the risk? Is this a sign that investors now receive a ‘return-free risk’ rather than ‘risk-free return’ on this sovereign debt?

The answer seems to be that other factors are having a much bigger impact on bond yields and risk premia than the recent downgrades. And investors and the wider market are focussing more on the underlying fundamentals than on the specific judgements of the ratings agencies.

In particular, we are seeing:

• a flight-to-quality towards deep and liquid bond markets as a result of continued uncertainty in the Eurozone
• continued sovereign debt purchases by central banks using “Quantitative Easing” policies
• purchases from institutional investors such as pension funds that are required to hold sovereign debt as part of their portfolio
  • increased demand for sovereign debt as a collateral to increase capitalisation of the banking sector required by new regulation such as Basel III, Dodd Frank etc[2].

The role of central banks

The recent disconnect between yields on sovereign debt and credit ratings has also been apparent at the other end of the rating spectrum. The financial crisis hit the European Western and Southern periphery particularly hard – and the economic consequences have been further magnified by continued austerity measures.

Rating agencies have responded to these developments by sharply downgrading the credit quality of those countries involved. In the case of Portugal, the rating fell even below investment grade[3] and Spain is only one notch away from junk status. While the bond yields originally more or less followed the downgrades, since July 2012 this relationship has also disconnected.

The reason is the European Central Bank (ECB). In order to prevent the spread of the contagion from the periphery to the rest of the Euro zone and keep the yields on peripheral debt below the unsustainable benchmark of 7%, on 26 July, Mario Draghi, ECB president, stated that the ECB will do “whatever it takes” to preserve the Euro single currency. The ECB coupled its efforts by extending the range of collateral it accepted on loans to allow commercial banks in the Eurozone’s periphery to continue to access financing.

As a consequence, Spanish, Italian, Irish and Portuguese sovereign bond yields have eased despite further credit downgrades.

Investment decisions should be based on broad evaluations of risk  

Our quarter one 2013 Country Risk update reflects these developments. It shows that the UK is still one of the lowest risk countries in the world, alongside large chunks of Northern Europe and America. And the EU periphery risk-profile is also improving due to ECB interventions. See our latest update here: http://www.pwc.co.uk/the-economy/issues/country-risk-premia-quarterly-update.jhtml

The upshot for investors is that credit ratings alone can no longer be viewed as the only metric to gauge the risk of buying foreign assets. A wider consideration of the economic, regulatory, financial and political conditions is crucial for making wise investment decisions. And the assessment of country risk needs to be more specifically tailored to the specific investment opportunity.

Fortunately for investors, we are well placed to help out!  We have has a strong in-house team of country risk premium specialists available to help clients understand the impact that the latest developments might have on their existing global investments and future expansion strategies.

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[1]Singh (2013), The changing Collateral Space, IMF Working Paper, WP/13/25

[2] For the purpose of this article we exclude the analysis of Greece

[3] For the purpose of this article we exclude the analysis of Greece

Milos Bartosek:  Contact by email | Tel: +44 (0)20 721 34301
Robert Vaughan:  Contact by email | Tel: +44 (0)20 721 22521

Why the UK economy is not rebalancing

By Andrew Sentance, Senior Economic Adviser, PwC

Official UK economic policy statements repeatedly emphasise the need to rebalance our economy. The idea is that growth before the financial crisis was too dependent on financial services and consumer spending.

Over the recovery, ministers and senior Bank officials have argued, we need a bigger contribution to growth from non-financial businesses – especially manufacturing - and from investment and exports.

But four years into the recovery, there are few signs of this shift. Financial services have contracted – with banking and insurance activity down 9% since 2007. But manufacturing output has fallen by 8% over the past five years – almost as much.

Investment spending has been sluggish, with businesses conserving cash and uncertain about economic prospects. UK capital spending was just over 14% of GDP in 2011 and 2012 – the lowest ratios for sixty years – compared to 17-18% before the financial crisis.

And though exports have grown, imports have risen even faster. That has pushed up our deficit with the rest of the world - to nearly £60bn last year. In 2012 we recorded the fourth highest UK balance of payments deficit as a share of GDP (3.7%) since 1948. Only in 1974 and 1988/89, when our economy was massively overheating, were the figures higher.

The UK economy remains heavily dependent on spending by consumers and government.  Instead of falling, the share of public and private consumption in UK GDP reached a post-war high in 2012 – at 88% of GDP.

The official response to this lack of rebalancing is to argue that it is a matter of time. According to senior ministers, progress will be “slow and difficult”. We need to be patient.

I take a different view. We should reappraise our notion of “rebalancing” and the policies needed to bring it about.

First, ministers and central bankers are not best placed to judge which parts in the economy need to grow and which should reduce in size. Their policies should support growth across the economy and not favour specific sectors. The bulk of our economy is made up of services industries, whereas manufacturing contributes just over 10% to GDP. And it is services that have led the UK recovery – with output now back above the pre-recession peak in 2008.

Many of our services industries are successful exporters, including financial services. In professional and business services, output has risen by about 5% per annum since 2009. Education is also a very important services exporter, by attracting revenue from foreign students. The same is true of the creative industries – music, design, computer software, etc.

Second, a weak pound is not helping to rebalance the economy. Though sterling has fallen 20-25% since mid-2007, it has brought little benefit. The UK no longer has large price-sensitive exporting industries which gain from a competitive devaluation (like coal, steel and heavy engineering). Our manufacturers are now high-skill and high-tech and produce highly specialised products which sell on quality rather than price. Instead of supporting growth, the fall in sterling has pushed up import prices and inflation, squeezing consumers and firms and adding to uncertainty about the future direction of the economy.

Third, we need a much stronger emphasis on supply-side policies – measures that help make the UK a more attractive location for investment and wealth creation, encourage new firms to start up and incentivise businesses to expand and take on new workers. That means cutting back the burden of business regulation, rewarding firms investing in skills, accelerating the development of new transport infrastructure and simplifying and streamlining our over-complex tax system.

The main way in which the UK government should be seeking to rebalance the economy is through reducing the burden of public spending, allowing the private sector more scope to develop new business opportunities. Many of these opportunities will be in the services sector, not just manufacturing. And we won’t help ourselves by perpetually devaluing the pound – which is a surefire recipe for higher inflation.

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Andrew Sentance:
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Squeeze or no squeeze?

By John Hawksworth, Chief Economist

The latest labour market data from the ONS showed regular pay in the three months to February 2013 up by just 1% on a year ago. Given that the latest consumer price inflation rate is 2.8%, this appears to imply a heavy squeeze on consumer incomes over the past year.

The latest data represent an intensification of the trend seen in 2012 as a whole, when average earnings growth was around 1.6%, implying a 1.2% real squeeze compared to average CPI inflation of 2.8% in 2012.

But this earnings data contrasts with the broader measure of household disposable income (HDI) published by ONS in the national accounts on 27^th March. This showed relatively healthy growth of HDI of 4.8% in 2012 as a whole in cash terms, or around 2% in real terms. This underpinned a respectable growth rate of consumer spending of 3.9% in cash terms or 1.2% in real terms in 2012, despite some rise in the household savings ratio in that year.

As the chart below shows, this marked divergence between real earnings growth and real HDI growth has also been seen in earlier years, with the more comprehensive HDI measure showing consistently stronger growth since 2009 (although still relatively weak HDI growth by historic standards).

So what is going on? Are households being squeezed or not?

The first point to note is that subdued average earnings growth in 2012 was combined with strong employment growth in that year (although this seems to have flattened off in early 2013). So total wages and salaries grew by 3% in cash terms in 2012, boosted by 1.4% employment growth – around twice the growth in the number of UK households over this period.

Furthermore, other sources of income grew faster on average than wages and salaries. In particular, with self-employment increasing strongly, the profits earned by the household sector from such activity grew by 6.4% in 2012, more than twice as fast as wages and salaries.

Second, social security benefits also rose relatively fast at 5.7% in cash terms in 2012, with state pensioners in particularly seeing relatively generous indexation of their incomes. The total number of benefit recipients has also risen with a sluggish economy.

Furthermore, direct tax deductions from income actual fell by 0.9% in cash terms in 2012, perhaps in part reflecting action by some high earners to avoid the new 50p top rate of income tax.

These three factors help to explain why household disposable incomes rose by 4.8% in 2012 despite wage and salaries going up by only 3%. Real wages have adjusted down to keep employment up, but other sources of income – notably net payments from the government – helped to cushion the blow for households. This in turn helped to sustain consumer spending in 2012 despite households remaining cautious about borrowing more.

The question is how far this relatively benign trend might continue in 2013. Benefit regimes are being tightened up and the fall in direct tax payments in 2012 may not be repeated although there are some tax cuts due in 2013 through higher personal allowances in particular. The rise in employment also seems to have flattened off in the last three months, with more people wanting to work (as shown by reduced economic inactivity rates) but finding it hard to get a job (as shown by increased unemployment rates in the latest data). This is putting further downward pressure on real wages.

All of this suggests that household disposable income growth may not be as strong in 2013 as in 2012, which either means slower consumer spending growth, or reduced household savings rates. Which of these two reactions predominates will be one of the key determinants of how strongly the economy recovers over the rest of this year. Our main scenario is that we will get some growth, but it will remain very slow and bumpy.

John Hawksworth:
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Rumours of the demise of technological growth are greatly exaggerated

By Esmond Birnie, Chief Economist in Northern Ireland

In the UK and in some other European economies we have a productivity puzzle. Since the onset of 2007-8 banking crisis, levels of GDP per worker appear to have slumped. According to the latest figures from the Office for National Statistics , UK market sector productivity has fallen to its lowest level since 2005.

In the UK, the flip side of this weak productivity performance is that employment has been resilient, despite the relatively weak economic recovery. But could something deeper be going on? Is the productivity reversal the outcome of a slowdown in technological growth – an idea associated with the US economist Robert Gordon and discussed in The Economist earlier this year?

We should not take growth for granted. If we accept the heroic estimates made by the economic historian Angus Maddison^[1], then there was only marginal improvement in the level of output per head during the entire millennium and a half up to 1500. Thereafter, modern economic growth gradually accelerated, as the Chart below shows.

The post-War golden age of the 1950s-60s stands out with some decline thereafter. US data may present a gloomier picture. Gordon emphasises how US GDP per head growth reached a peak of 2.5/3% in the best part of the golden age, falling to about 2% in the 1970s and then less than 1% average in the 2000s. Similarly, according to Gordon, growth in GDP per hour worked slumped badly in the 1970s, picked up temporarily during 1996-2004, only to slide back to 1.3%  since 2004 (a similar rate to the average for 1972-1996).

There are, indeed, some reasons to be fearful:

• Over the last two centuries, we have had a series of economy wide changes in systems of technology, notably steam power, electricity, internal combustion engines and, most recently, IT, but it is not clear if we will see another of these any time soon. To the extent that the last great “swarm” of innovation was given a tremendous push by the recovery from the Great Depression and the demands of the Second World War, then it was induced by very unusual historical circumstances.
• Surely diminishing returns will eventually strike micro-electronics? Moore’s law whereby the amount of capacity per unit keeps growing may eventually hit a physical limit.
• Diminishing returns appear to have already hit pharmaceuticals. Certainly, increased spending on R&D has not been accompanied by an equal  increase in numbers of drugs^[2].
• Similarly, successive generations of nuclear reactors have cost more to construct. In defence aeronautics the real cost of each generation of aircraft is much higher than the previous one. Norman Augustine’s “law” posited that on current trends the entire US defence budget would allow only one jet fighter to be operated in 2054!
• Particular resource constraints may loom, e.g. water.

However, there are also reasons to be cheerful about the future contribution of technology:

• Global R&D is at a record, and growing, level ($1.4trillion).
• There have never been so many graduate and technician engineers and scientists in the world.
• Globalisation and the larger market produced will surely lead to higher returns to innovation in the future.
• Perhaps the 1970s deceleration in Western productivity growth owed a lot to the rise in oil prices. It is beginning to look as if the long run outlook for world energy prices may not be as gloomy as had once been feared – as PwC’s recent shale oil report suggests. Certainly the much vaunted “peak oil” hypothesis has not been realised and it is not likely to any decade soon.
• The slowdown in R&D productivity in pharmaceuticals may not be inherent but amenable to adjustments in the research process and greater use of more cost effective outsourcing.

We may have yet to see the full benefits of investment in recent technologies. Advanced technology is being applied to more and more sectors. When asked about the historical implications of the French Revolution, the 1970s Chinese Premier Zhou Enlai said it was “too early to say”. Something similar could be said about the full impact of, say, IT, nano tech and genetics as they are applied across a wide range of sectors.

Productivity growth rates can vary with the economic cycle – as we have seen in the past. For now, rumours of the demise of technology-driven growth seem to be greatly exaggerated.

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[1] A. Maddison 2001, The World Economy A Millennial Perspective, OECD, Paris.

[2] PwC estimates show a steady increase in pharma R&D spend during 1995-2010 but a decline in the number of new therapies approved by the American FDA;  2008, Pharma 2020: Virtual R&D- Which path will you take?, at www.pwc.com/gx/en/pharma-life-sciences/pharma-2020/pharma2020-virtual-rd-which-path-will-you-take.jhtml

Esmond Birnie:
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Is the NHS up to the productivity challenges ahead?

By Nick C Jones

The combination of increasing demand and a tightening financial envelope means that business as usual is no longer an option for the NHS. Our recent report with the Nuffield Trust – The anatomy of health spending – reviews NHS spending and productivity over the period 2003/04 to 2011/12 and finds cause for concern. While the NHS found the savings necessary in 2011/12 – making £2.85 billion of Quality, Innovation, Productivity and Prevention (QIPP) savings from acute providers – below these top-line numbers there are stark differences in financial and productivity performance.

Having a clear understanding of how to manage financial performance is critical to NHS providers. Worryingly, an increasing minority of NHS and foundation trusts are in deficit, with seven trusts reporting a deficit for three years or more and several having limited scope to resolve their difficulties due to financial commitments such as PFI contracts.

With little improvement in many organisations, increasing productivity remains a fundamental challenge for NHS and foundation trusts. Much of the savings so far have been driven by national initiatives – such as the government’s public sector pay policy – and there is little evidence of widespread local innovation or productivity improvements. With the number of staff falling, improving labour productivity is critical.

The research finds that NHS and foundation trusts with a larger proportion of doctors and other medically trained professionals are likely to have higher levels of labour productivity, despite the higher wage costs. This highlights the importance of investing in up skilling staff. Larger trusts also tend to have slightly lower labour productivity, suggesting the existence of diseconomies of scale in regard to labour with implications for hospital mergers.

While so far the NHS has managed to balance its books, overall a step change in productivity is needed if the efficiency challenges ahead are to be met.

At PwC we’re working with people across the health service and the public throughout 2013 to debate what the NHS will – and should – look like in ten years time when it reaches its 75th anniversary. Join the discussion at www.pwc.co.uk/nhs75.

Stepping up the investment attractiveness ladder

By Smita Mehta

The UK has historically been a preferred destination for inward investment from other developed economies. However, recently its position has been waning in some of the rankings. It faces threats from economies such as Germany which continues to maintain a strong position as an engineering powerhouse, and others like Poland who are intensifying efforts to attract foreign businesses in the aftermath of the Eurozone crisis. What can the UK do to go up the rankings? The latest issue of our UK Economic Outlook report has a special article on this topic focusing on attracting more inward investment to the UK from the BRICs.

Over the past 10 years, the inward investment stock to the UK has been rising consistently other than for a blip after the financial crisis in 2007, but has since started to recover again. The US and other advanced economies like France, Germany and Japan are still the largest investors in the UK, but investment from the BRICs including Hong Kong has trebled since 2001, albeit from a very low base (see chart below). India and China, in particular, have consistently figured in the top 10 project and job creators since 2002.

Inward investment to the UK – change from 2001

Whilst China and India have been prominent inward investors to the UK, investment from Russia, Brazil and other emerging economies is still low in comparison. The UK should capitalise on its strengths, and work on its weaknesses, in order to attract further investment from these fast growing countries.

UK’s key strengths lie in its flexible labour markets, strong brands, high quality manufacturing facilities in certain sectors (e.g. aerospace and pharmaceuticals) and its reputation as a world class financial centre. It was this combination of brands and cutting edge capabilities which attracted large investments from Indian companies such as the Tata Group over the past decade. Factors such as support from government and the ease of having a base here to increase their global reach have also attracted businesses from China and India.

To further improve this position, the UK needs to improve its transport infrastructure relative to European economies such as France and Germany. Also, while the corporate tax rate has been reduced since 2010, personal tax rates for senior executives remain relatively high, which can prove a deterrent to foreign investment.

In order to attract investment in R&D and innovation, where the UK already has a reputation as a hub, the country needs to capitalise on the great opportunity provided by its world class universities. Furthermore, UK has cutting edge capabilities in green technology along with the availability of government incentives in this sector. This could be a big draw for businesses in emerging economies with clean energy objectives.

By exploiting these opportunities and improving its areas of weakness, the UK could become a European destination of choice for inward investment from the BRICs. This in turn could provide a significant boost to output and employment in the UK in the medium to long run.

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Smita Mehta:
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Slow and bumpy road to recovery

By John Hawksworth

The latest issue of our UK Economic Outlook report has one central message - the recovery will be slow and bumpy. But it is not all bad news: we think there is potential for stronger growth in the longer term if UK businesses can tap into the investment potential of fast growing emerging markets.

In the short term, growth will remain hard to come by: it was barely above zero in 2012 and looks set to be only around 1% this year, even if major accidents can be avoided in the eurozone. Growth could pick up to around its long term 2% trend in 2014 and beyond, but the ‘new normal’ will be for constrained growth for some years to come as the UK and other major advanced economies work through the painful process of adjusting to the legacy of the global financial crisis.

UK consumers will continue to be hampered by prices rising faster than earnings in 2013-14, although this real wage squeeze should ease relative to the situation in the last five years as the chart below shows.

Real earnings squeeze expected to moderate in 2013-14

Source: ONS, Consensus forecasts for nominal earnings growth (Feb 13), PwC main scenario for CPI inflation.

Retailers will continue to face a tough time due also to the continuing switch to online sales. We also don’t expect any strong rebound in average UK house prices even if London continues to buck the trend. But unemployment should continue to drift down and large businesses do have the cash to invest if and when demand does start to pick up.

Slower growth in nominal GDP means that public borrowing again looks set to overshooting targets this year, perhaps by around £8 billion in our main scenario, so the Chancellor’s options for the Budget are clearly constrained. Indeed he may need to find additional fiscal tightening in the next Parliament over and above what has already been announced. More tightening in the short term should be avoided, however, given that the fragility of the economy and the focus on boosting growth.

There is no quick and easy way to generate growth, but we think that the Chancellor should focus what limited firepower he has on increased capital spending on housing and transport infrastructure, supported by appropriately targeted business tax incentives. This should boost growth and employment in the hard hit construction sector, while also supporting long-term supply side objectives.

High among these longer term objectives should be making Britain a location of choice for inward investors from the fast growing emerging economies. This will require the UK to improve the quality of its infrastructure, make the most of the research capabilities of its world class universities, and maintain a competitive tax regime. In fact, that’s not a bad shopping list for the Chancellor to focus upon in the Budget. But we should not expect miracle solutions – it will be a long and bumpy road to recovery.

John Hawksworth:
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Women in work – UK slides down PwC rankings

By Yong Jing Teow and John Hawksworth

To mark International Women’s Day (8^th March) new PwC research reveals women in the UK are less likely to be in full-time work and experience greater pay inequality than their counterparts in other developed countries.

Our new PwC Women in Work Index shows that the UK was ranked in 18th position out of a sample of 27 OECD countries in 2011 (see table below). This is based on a weighted average of five key indicators of female economic empowerment: the equality of earnings with men; the proportion of women in work both in absolute terms and relative to men; the female unemployment rate; and the proportion of women in full-time employment.

The Nordic countries have consistently remained in the lead. In 2011, Norway was in pole position, followed by Sweden, Denmark, New Zealand and Finland. Though the UK has seen improvements in performance across most indicators since 2000, it has fallen behind some other countries (the Netherlands, Austria, Belgium, Poland and Germany) that have made more significant gains since 2000. In particular, UK progress has almost stalled since 2007.

Rank 2000	Rank 2007	Rank 2011	Country	Index 2000	Index 2007	Index 2011
1	1	1	Norway	76.3	79.2	81.3
2	3	2	Sweden	74.7	74.9	75.2
3	2	3	Denmark	72.5	78.7	73.9
6	4	4	New Zealand	62.8	70.3	69.7
5	5	5	Finland	63.7	68.6	68.8
8	6	6	Canada	56.3	65.2	66.1
10	11	7	Switzerland	54.0	60.8	63.6
12	12	8	Australia	51.2	60.7	62.7
4	9	9	Portugal	64.9	61.6	62.1
19	17	10	Netherlands	46.7	54.9	61.0
9	8	11	France	55.8	62.3	60.9
15	16	12	Austria	48.6	55.2	60.6
18	15	13	Belgium	46.8	56.0	59.9
16	13	14	Poland	48.2	57.2	59.4
17	21	15	Germany	47.5	51.4	59.3
11	7	16	Hungary	53.2	62.3	59.3
7	10	17	United States	60.0	61.4	58.8
13	14	18	United Kingdom	50.4	56.4	57.3
22	22	19	Israel	40.8	51.2	57.0
14	18	20	Czech Republic	49.9	52.7	53.5
26	19	21	Spain	26.5	52.5	53.0
21	20	22	Ireland	40.8	51.4	52.6
20	24	23	Slovak Republic	43.9	45.0	50.5
23	23	24	Italy	31.7	45.2	41.2
25	26	25	Japan	28.8	36.3	40.2
24	25	26	Greece	29.0	40.8	37.4
27	27	27	Korea	25.0	31.3	29.1
			Average	50.0	57.2	58.3
Source: PwC analysis of data from the OECD, Eurostat, Australian Bureau of Statistics and Statistics Bureau of Japan

The UK’s best-performing area in 2011 was the overall rate of female labour force participation. Its worst performing was the share of female employees in full-time jobs, which may adversely affect earnings, pensions and job security (although it could suit some women with caring roles). Norway’s strengths lie in its high female labour force participation and the low gender gap between female and male participation in the labour force.

One striking result from our research is that the UK’s progress has ground to a halt since the financial crisis, pushing the UK down to 18th position in the Women in Work Index in 2011, from 13th in 2000 and 14th in 2007. It seems that the recession has hit women particularly hard, especially with public sector job cuts disproportionately affecting women.

Our index makes clear that UK businesses and policymakers still need to do more to address the needs of female employees in areas like flexible working, childcare, female promotion pipelines and diversity goals. Only by putting diversity at the heart of the business and policy agendas can the UK truly harness the talent and skills of the fairer sex.

For more information on the PwC Women in Work Index, please visit:

http://www.pwc.co.uk/the-economy/publications/women-in-work-index.jhtml

Our Women at PwC blog discusses and debate the issues faced by women in the workplace, featuring contributions from inspirational women across the world. Join the conversation.

Yong Jing Teow:
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John Hawksworth:
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Africa is taking over the “7% growth club”

By Himani Gupta^[1]

Africa is on the up. It presents international businesses with immediate growth opportunities, particularly in the infrastructure sector. In the latest issue of our Global Economy Watch, we have taken a closer look at the prospects for Africa.   Most African economies have shown resilience following the financial crisis and their growth momentum is expected to continue in the medium term, driven by rising commodity demand from Asia and other emerging markets, favourable demographics, improving productivity levels and investment in infrastructure projects. In fact, nine African economies -- Mozambique, the Congo, Liberia and six other economies^* are expected to achieve growth rates of 7% or more this year. To put this into perspective, China, India and Vietnam are the only other large emerging markets in the “7% growth club”.

Business leaders in Africa are very optimistic about the future with more than 90% of CEOs based in Africa being confident or very confident about their revenue growth prospects for the next 12 months. This is the second highest figure recorded after Latin America. High African growth rates mean that international businesses will be presented with immediate opportunities to grow. For example, across the whole continent of Africa, the World Bank has identified a funding gap for infrastructure projects worth around $48 billion. Long-term projects like these could provide returns for cash rich UK entities (be it companies or investment vehicles). Engineering and construction firms can also take advantage of the opportunities on offer.

But, as with all business projects, CEOs and their teams need to factor in and account for the practical costs and risks of doing business in Africa. For example, the World Bank estimates it takes three times as long to start up a business in Nigeria, compared with an average OECD country. In some cases an indirect presence in the country, via a partnership with a local business, could prove to be a wiser strategy. Our heat map (Figure 1) shows that in most cases the larger African economies have a clear demographic advantage relative to other emerging markets, but the key challenge is in creating an environment where it is easier for business to operate.

Figure 1 - African countries have more favourable fundamentals than some of the larger emerging economies

Another  significant challenge for Africa is its over-reliance on commodities. One of the main reasons Africa has been growing fast over the last decade is because of high commodity prices. This, in turn, has attracted investments from resource-hungry emerging economies such as China that are keen on securing raw materials for their expanding manufacturing base. Our analysis shows that FDI to the region was up by US$113 billion during the 2008-12 period compared to US$495 billion in the 2003-2007 period, with a significant proportion of this capital flowing into the natural resource and energy sectors. However, exporting natural resources to fuel economic growth is not a sustainable long-term growth strategy. To sustain their development over the long-term, African economies will need to diversify away from natural resources and move up the value chain.

Only when these challenges have been met will African economies make major inroads into the income gap with more established emerging market economies - in Latin America, Asia and the Former Soviet Union.

[1] Richard Boxshall and Barret Kupelian also contributed to this article

Himani Gupta
Contact by email | Tel: 020 7804 5475