Economic and advertising outlook for 2018

10 Jan 2018  |  Dan Hanson and Matthew Bloxham 
Economic and advertising outlook for 2018

Dan Hanson and Matthew Bloxham explain how economic challenges and new business threats will impact agencies and the wider advertising sector in 2018

A living standards squeeze was the defining theme of 2017. The good news is that things will get easier for households this year, though it will require uncertainty around the Brexit negotiations to be lifted for the economy to fire on all cylinders.

Despite that backdrop, advertising expenditure looks set to build on a resilient 2017 with faith continuing to be placed in digital. Though that may all change once advertisers are able to get a good read on the return they are getting on digital spend.

Having acted as a pillar of resilience in the immediate aftermath of the Brexit vote, the household sector bore the consequences of the sharp fall in the pound in the aftermath of the referendum in 2017.

Inflation rose to 3.1% in November, having registered just 0.5% in June of 2016, while wage growth remained stuck around 2%. The result was that households endured a squeeze on their living standards.

There is light at the end of the tunnel for the economy’s biggest spenders - in fact the worst of the real income squeeze has probably passed. The inflation numbers are likely to start edging back over 2018 as the impact of the fall in sterling fades and wage growth is likely to pick up a touch further.

While things will look a little rosier for consumers, businesses, in aggregate, are likely to remain cautious. The UK has managed to do enough to convince the EU to move talks on to trade, but there is still a huge amount of uncertainty about what the deal will ultimately look like while a transition agreement remains elusive.

The sooner both parties find a way forward, the sooner UK companies will know what the relationship with the biggest single market in the world will look like and be able to make investment plans. That’s particularly the case for exporters who would be more likely to take advantage of the current strength of the global economy.

Speculation will continue to bubble about whether the Bank of England will raise interest rates again in 2018. The central bank themselves have indicated that a couple of hikes are likely to be needed in the next three years to get inflation back close to its 2% target.

Financial markets are currently ascribing about a 70% chance of another 25 basis point rate rise by the end of 2018. That’s probably too high, the data flow is likely to prompt the central bank to hold fire on the next rise. The unemployment rate continuing its relentless decline is the most likely reason for the central bank expediting the next rate rise.

The behaviour of the unemployment rate in recent times goes to the heart of the economy’s biggest challenge - productivity growth. Businesses have taken advantage of the relatively cheap pool of labour and the willingness of individuals to work more hours to meet demand in recent years. With that source of growth close to exhausted, companies will have to rely on efficiency gains if they are to meet demand over 2018 and beyond. But with the official data suggesting the economy is only as efficient as it was 10 years ago, the challenge is a significant one.

Bringing it all together, the economy will probably grow by about 0.4% a quarter in 2018 and by 1.4% overall, down a little from 1.8% in 2017.

But what about advertising?

The UK advertising market was remarkably resilient in 2017 against the backdrop of a difficult economic environment. The most recently published Advertising Association / WARC Expenditure Report revealed total spending on advertising of £10.8bn in H1, the highest figure for the first six months of any year since monitoring began in 1982.

Not surprisingly, despite all the challenges around measurement and brand placement, growth is being driven by digital and especially mobile.

As we enter 2018 advertisers will be faced with three familiar questions. How much to spend, where to spend it and who with. But since the world of digital remains the advertising equivalent of the Wild West, brand managers probably have less confidence in the conclusions they are reaching than at any time in recent history.

It is hard not to feel that advertisers are, in aggregate, over-spending across all media formats as the digital environment evolves"

If things do get easier for UK households in 2018 and that encourages more discretionary spending, then there’s every chance that advertising expenditure will remain buoyant through 2018. It might even encourage the big FMCG firms, noticeably cautious in 2017, to put more money to work again in pursuit of volume growth.

But it is hard not to feel that advertisers are, in aggregate, over-spending across all media formats as the digital environment evolves. When digital measurement finally starts to deliver the data needed to perform robust, reliable analysis we could well see budgets being trimmed. But that’s most likely a 2019 issue.

Major sporting events slated for 2018, especially the FIFA World Cup, might flatter spending on linear TV in the short term, but the longer term trend is clear. TV viewing will continue to move online and its share of consumer engagement will shrink. Within the next 10 years traditional advertising funded broadcasters as we know them today simply won’t exist.

Digital will continue to grow its overall share of the pie, even if 2018 sees a higher level of experimentation by advertisers across different online assets. So far, much of that experimentation has been a reaction to unexpected negative events - the YouTube ad placement problems, Diageo’s Snapchat censure, for example. Experience, and the push back from brand managers (led by P&G) for better data and greater transparency from digital platforms, should lead to better risk management.

Google and Facebook are growing at the expense of other digital platforms and some observers don’t see this digital duopoly being broken. History tells a different story though. Rarely are such large, highly profitable and (still) fast growing market concentrations permanently enduring. Something (regulation?) or somebody (Amazon?) will present a credible challenge to the status quo before too long. But not before Google and Facebook have grown even bigger.

The central role of the full service advertising agency will remain in considerable threat in 2018 from disintermediation, especially in digital media buying, and disruptive competitors.

The strength of rebuttals about the scale of the challenge from consultancy firms like Accenture and Deloitte has an air of denial about it. There’s no doubt that both sides are increasingly competing for the same client wallet.

Ad agencies will always hold the high ground on creative and consulting firms on technology. Neither side can build sustainable advantage through organic investment alone, although efforts by the likes of WPP to elevate account management to the holding company level should definitely help.

Expect to see more M&A in 2018 as both sides continue to short circuit the acquisition of new capabilities and credibility. Don’t expect everybody to get it right though.

Dan Hanson is an economist at Bloomberg Economics
Matthew Bloxham is a senior analyst at Bloomberg Intelligence

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