UK economic forecast: The year ahead for media and advertising

17 Jan 2017  |  Dan Hanson and Alexander Wisch 
UK economic forecast: The year ahead for media and advertising

Dan Hanson and Alexander Wisch of Bloomberg Intelligence explain how economic challenges will impact agencies and the wider media and advertising sectors in 2017

2016 will always be remembered as a year the UK voted to part ways with the biggest single market in the world. The full consequences will only be known in time, but in the near-term at least, the economy showed itself to be a tough nut to crack. That resilience is likely to be tested in 2017 - in all likelihood, the economy will slow somewhat and that could impact the advertising industry.

Economic forecasters' prediction that the vote to leave the EU would lead to a sharp loss of confidence and cause the economy to grind to a halt proved too pessimistic. The Great British Consumer kept calm and carried on spending and the history books will most likely show that the result of the vote on June 23 had next to no impact on the economy in the subsequent six months.

So, what's in store for the economy in 2017?

Theresa May has said that Article 50 of the Lisbon Treaty will be triggered by the end of March - at that point the clock will start ticking on the two-year negotiation process that will see the UK attempt to grind out a new deal with its biggest trading partner.

It's impossible to know what compromise will ultimately be reached and because of that, a higher than usual level of uncertainty is likely to be cast over businesses. The choice to invest depends heavily on the expectation that some return will be made further down the line - if the future is unclear, waiting to see might be the preferred strategy, especially when the decision is costly and potentially irreversible.

Perhaps a bigger theme across 2017 will be the pound. The currency has become a slave to politics and jumps whenever hints are dropped about the government's negotiation strategy. The 15%-odd depreciation since June 23 is likely to have far reaching effects on the economy.

Perhaps most significantly, it will lift consumer price inflation, potentially above the Bank of England's 2% inflation target, raising the cost of living in UK households. As consumers feel the pinch in their pocket, they could have the wind knocked out of their sails which could well mean economic growth slows.

Of course, the flipside of the weaker currency is that it improves the competitiveness of exports; however an important caveat to that argument is that UK exports tend to be insensitive to price shifts, which makes it harder to boost market share when the pound falls. And even those who could drop their foreign prices, invest in capacity and boost output may decide it's too risky at a time when the relationship with the UK's biggest export market is about to get a makeover.

The bottom line is that growth in 2017 may be harder to find than last year.

...But what about advertising?

The weaker economy is likely to hit advertising expenditure, as this type of investment by corporates is usually reined in when a weaker growth outlook starts impacting consumer sentiment - it is very sensitive to the economic cycle.

This is likely to accentuate long-term shifts in the allocation of media expenditure. In particular, more print-to-digital migration, and within digital, more desktop-to-mobile migration, with an emphasis on social advertising. This is perceived as being able to deliver better value for money.

With further growth in digital advertising, programmatic transactions are likely to grow their share, bringing rising concerns about fraud, viewability, and brand risk. This will be a key challenge for agencies, who may need to act not only as consultants and advisors, but also raise their game as auditors to defend the interests of their clients.

Agencies will also contend with rising competition from strategy and technology consultants coming into their space, with broader solutions that go deeper into customer relationship management than traditional advertisers. Accenture's acquisition of Karmarama late in 2016 shows consulting firms pose a meaningful threat, coming in with a different culture and client relationships.

In terms of viewership and media consumption, multiple screens will become increasingly the norm, with the industry still struggling to find appropriate metrics to measure audiences across multiple devices in a consistent manner.

Readers, viewers and listeners are still as keen as ever in accessing engaging content, though they increasingly do so in non-traditional ways. Consistent measurement metrics may help show that traditional media is as attractive as it ever was, even though its content is accessed in an array of digital media outlets that capture a growing share of eyeballs.
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Dan Hanson is a UK Economist at Bloomberg Intelligence
Alexander Wisch is an Industry Analyst, Telecoms & Media, Europe, at Bloomberg Intelligence

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