The advertising market needs to brace itself for inflationary pressures, as the cost of living crisis hits the UK according to the latest Advertising Expenditure report from the Advertising Association and WARC. 

According to the report despite encouraging growth across most sectors, real growth in the UK’s ad market is expected to be just 1.8% this year when accounting for inflation. Erosion of margins due to increased costs may affect marketing budgets, with inflationary pressures likely to continue into 2023.

The latest dataset suggests the UK's ad market will grow by a further 4.4% in 2023, to a value of £37bn. This represents a 1.0pp downgrade from the groups’ April forecast, and equates to a 0.9% contraction in real terms. 

The report points to a bear market, citing ‘inflationary pressures and issues faced by all businesses and families such as the rising cost of living – coupled with geopolitical uncertainties. A state of play which leads the research to conclude that ‘the UK advertising market is liable to see further headwinds on the horizon.’

Inflation is beginning to bite

James McDonald, Director of Data, Intelligence & Forecasting at WARC warned that inflation is now starting to bite. He explained: “For advertisers, higher costs will carve into margins, and while a real term rise of 1.8% in ad investment is expected this year – compared to a pre-Covid average of +2.6% – the market is now set to contract in 2023 after accounting for these ongoing inflationary pressures.”

However, the research was not all doom and gloom, revealing that UK adspend rose 28.3% to a total of £8.6bn in the first three months of 2022, 7.7 percentage points ahead of its previous forecast in April.

The report, which is the only source to collect advertising revenue data across the entire media landscape, upgraded the outlook for the total UK advertising market to 10.9% growth, with ad spend reaching a new high of £35.4bn. Online advertising continues to fuel recovery and is forecast to account for 74.3% of all spend this year, in comparison to 73.5% in 2021.

Despite encouraging growth across most sectors, real growth in the UK’s ad market is expected to be just 1.8% this year when accounting for inflation. Erosion of margins due to increased costs may affect marketing budgets, with inflationary pressures likely to continue into 2023.

Stephen Woodford, CEO, Advertising Association, commented: “It is encouraging to see growth in our industry over Q1, as the economy continues its recovery year-on-year following last year’s Covid-19 lockdown. However, the pressures of inflation on living standards and economic growth are at the top of everyone’s mind, and these rising costs may represent a real-term contraction of nearly 1% in 2023 for UK advertising investment.

He continued: “As the UK’s political leadership changes, it is important to recognise the value that advertising brings to the economy in supporting competition, innovation and growth at this critical time. A consistent, evidence-led policy-making approach, with due consideration of industry views and expertise, will help create the conditions which encourage, not hinder, economic growth and will be integral to the ability for businesses to weather the challenges of the coming year.” 

The full picture in Q1 2022

Data show that UK adspend rose by 28.3% in the first three months of 2022, as growth was recorded across all media. Online formats – notably search, display (including social) and classified – grew the most in absolute terms, as the market share reached 74.9% for online channels combined.

Triple and quad-digit recoveries were seen in the OOH and cinema sectors, respectively. The publishing and direct mail sectors also saw growth over these three months, resulting in improving outlooks for the year ahead. These figures are consistent with AA/WARC’s provisions for year-on-year growth.

Although these figures do show exponential growth, in comparison to Q1 2021, it is important to remember that Covid-19 lockdown measures were still in place across the UK, diminishing advertising activities and revenue across the media landscape.