Written by Adam Smith, GroupM Futures Director

As the UK Government prepares to make deep public-sector spending cuts, consumer demand is likely to see very slow growth in 2010-2011. But marketers still have discretion over how they spend their budgets

 In April, just weeks before the UK general election, the Office for National Statistics revealed that the UK budget was in deficit to the tune of £163bn, resulting from the gap between Government spending of £704bn and receipts of £541bn. About half of this is supposedly ‘cyclical’, meaning, with a bit of luck, economic recovery will erase it, for example as the unemployed come off welfare benefits and rejoin the ranks of taxpayers. The remainder is ‘structural’, meaning it will pile up year after year unless the Government either stops spending or raises more taxes to cover it.

 Let us say the structural problem is £70bn a year, which is 5% of the economy. The Govern­ment aims to cover 20% by taxing more and 80% by spending less. A hypothetical VAT rise to 20% would cover most of the 20% (and would partly be ‘absorbed’ by brand owners). The Govern­ment would have this money to spend in its own way, so at least it would still be circulating as demand in some form. The other 80%, accounting for 4% of GDP, would simply disappear. Lightened of this toxic load, the long-run growth potential of the economy will improve. Until then, we have the short-run to get through.

 Consumer demand will bear the brunt of this, for instance in shrunken pay-packets in the public sector and in the parts of the private sec­tor which sell things to it, and in lower welfare payments. So consumer demand is likely to grow very slowly this year and next, if at all, and not enough to recover ground lost in 2009.

Such GDP growth as we might expect (the IMF reckons around 4% nominal this year and next) is only possible through a bounce in exports. The trouble is that over half our exports go to western Europe, whose economy is grow­ing slower than ours, and whose purchasing power falls when the Euro wobbles.

 All of which means we lack the economic prospects to support a strong ad recovery, which is why last autumn we expected no UK ad rev­enue growth this year. Marketers are not, how­ever, entirely at the mercy of events. Except in dire emergency, they have budgets and discretion to spend or withhold them, and in the first half of 2010 they chose to spend more than we expected. We doubt that this was in expectation of economic recovery: possibly cheaper media means higher ROI, so it was natural to invest more. The resulting inflation has sometimes been a shock, but only compared to the trough of 2009. GroupM’s media forecast, This Year Next Year, has revised 2010 up, but there is still a cool billion missing compared to 2008.

 TV inflation has been the main problem. Despite our best efforts, it is unpredictable and it often obliges an urgent and costly response to keep audience delivery to plan: we will always do everything in our power to pre-empt these unpleasant surprises. It’s worth contemplating what this year’s TV inflation spike might have been without the COI purdah, or without CRR. Compared to some continental TV markets this year, the UK has actually been a model of order and efficiency.

We don’t want to overdo the gloom. We’ve seen a definite recovery in business con­fidence. We see it in planning horizons stretching back out, and in restored discretionary spending which had been cut in recession, like large-format out-of-home, custom market research, and PR services, including media coaching and internal communications. We have seen, for example, instances of paid search ROI falling because of ‘brand health decay’, and advertisers putting this right by restoring brand investment. This must partly explain the TV lift, and it is interesting to note that advertisers generally appear to have funded this without plundering budgets for other media. We had imagined that, having fallen fastest, cars and finance would lead, but this modest recovery has been general. Indeed, these two categories may yet support a second leg to UK ad recovery. It could certainly do with one.