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Alan WilsonOxford Economics November 2008
The macroeconomic environment
2
The macroeconomic environment – a summary
3
Key issues
The global background
How severe a recession in the UK?
What structural changes are taking place?
Implications for the regional pattern of growth
The Global Background
5
Rising waves of financial stress
-10
-5
0
5
10
15
20
25
30
35
40
45
2004 2005 2006 2007 2008Source: Oxford Economics
US: Financial stress indicator
high stress
low stress
Credit crunch starts
End-year liquidity squeeze
Bear Stearns' rescue
Fannie Mae & Freddie Mac support
Lehmans' collapse, Paulson plan
6
At the same time, price rises were squeezing incomes
10
30
50
70
90
110
130
150
170
2000 2001 2002 2003 2004 2005 2006 2007 2008
80
100
120
140
160
180
200
220
240
260
280
Source: Haver Analytics
World: Commodity prices$/barrel 2000 Week 1=100
Brent oil(LHS)
Economist ($)commodity price
index (RHS)
7
2009 set to be a very tough year
-3
-2
-1
0
1
2
3
4
5
1990 1993 1996 1999 2002 2005 2008 2011Source: Oxford Economics
% yearUK
US
World: GDP growth
Eurozone
Forecast
8
Forecast summary
2007 2008 2009 2010 2011 2012
US 2.0 1.3 -0.4 2.5 3.6 3.8
Japan 2.0 0.5 -1.1 0.6 1.5 2.0
Eurozone 2.6 1.0 -0.5 1.2 2.0 2.3
of which:
Germany 2.6 1.3 -0.7 1.1 1.8 2.3
France 2.1 0.9 -0.3 1.2 1.9 2.2
Italy 1.4 -0.4 -0.8 0.5 1.3 1.7
UK 3.0 0.8 -1.0 0.9 2.6 3.3
South Korea 5.0 4.1 1.5 4.2 5.6 5.4
China 11.9 9.2 8.4 8.7 8.9 9.2
Other Asia 6.0 3.4 1.6 4.4 5.3 5.2
Mexico 3.2 2.0 0.4 2.1 4.6 4.9
Other Latin America 6.2 5.3 2.5 3.4 4.2 3.9
Eastern Europe 7.3 6.3 3.6 4.4 5.3 5.5
World 3.8 2.4 1.0 2.9 4.0 4.2
World (PPP) 4.8 3.6 2.1 3.7 4.6 4.8
World GDP Growth% Change on Previous Year
9
Will policy help? – co-ordinated rate cuts
0
1
2
3
4
5
6
7
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Source: Haver Analytics
US Federal funds target rate
ECB repo rate
UK repo rate
Official interest rates%
10
Fiscal policy to support demand
-10
-8
-6
-4
-2
0
2
4
1986 1990 1994 1998 2002 2006 2010Source: Oxford Economics
% of GDP
UK
US
Eurozone
World: Public sector deficits
Forecast
11
Medium-term challenge of rebuilding household balance sheets cannot be avoided
-2
0
2
4
6
8
10
12
14
16
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
World: household savings ratiosSavings rate, %
Source : Oxford Economics/Haver Analytics
Eurozone big-4
UK
US
The UK Forecast
13
Oxford Economics’ latest UK forecast
% September baseline forecast
September extended credit
crunch
November baseline forecast
GDP growth
2008
2009
2010
1.2
0.5
2.2
0.9
-1.0
0.3
0.8
-1.0
0.9
CPI inflation
2008
2009
2010
3.8
3.0
1.8
3.5
2.1
1.0
3.8
2.3
1.2
Bank rate 2008
2009
2010
5.8
4.6
4.2
5.5
4.0
3.0
4.6
2.0
2.1
Probability 50% 35% ?
14
Libor spreads widened post-Lehmans…
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Source : Haver Analytics
%
UK: LIBOR spread
3-month LIBOR
Bank rate
15
…and companies starting to feel the pinch
16
House price falls show no sign of slowing…
17
…and equity market sharply lower…
18
…with household wealth losses over £1.3trn
19
…and huge fall in confidence
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Haver Analytics
GfK NOP Index
UK: Consumer confidence
20
Blue Book shows even lower saving ratio…
-2
0
2
4
6
8
10
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
UK: Savings ratio%
Source : Oxford Economics/Haver Analytics
Now
Previous
21
…and huge swing needed in financial balance
22
UK companies better-placed than rest of EU…
23
…but GDP down more than expected in Q3…
24
…order books collapsing…
25
…and investment intentions cut back sharply
26
Policy stance has changed dramatically…
Bank rescue plan:
■ £50 billion to recapitalise UK banks, with £37 billion from government.
■ A new government-backed company to guarantee new short and medium-term debt issues by banks with maturities up to three years for use in refinancing maturing interbank borrowings. The government expects the take-up of the guarantee to be of the order of £250 billion.
■ The Special Liquidity Scheme (SLS) has also been doubled to £200 billion.
Cuts in interest rates – down 200bp in two months
Prospect of fiscal action:
■ Accelerating government investment
■ Tax cuts to be announced in the PBR - £10 billion?
27
Tax cuts key to easing saving correction…
28
…which is key uncertainty in forecast
29
Implications of alternative saving ratios
% 5% saving ratio
(November baseline)
7% saving ratio 9% saving ratio
GDP growth
2009
2010
-1.0
0.9
-1.6
0.1
-2.5
-0.2
CPI inflation
2009
2010
2.3
1.2
2.0
0.7
1.5
0.1
Bank rate 2009
2010
2.0
2.1
1.4
0.7
0.7
0.3
30
Oxford Economics’ forecast
2007 2008 2009 2010 2011 2012Domestic Demand 3.6 0.6 -1.4 0.6 2.4 3.2 Private Consumption 3.0 1.8 -1.6 -0.4 1.5 2.9 Fixed Investment 7.1 -3.2 -3.4 0.7 3.8 5.4 Stockbuilding (% of GDP) 0.5 0.0 -0.2 -0.1 0.2 0.2 Government Consumption 1.8 2.2 1.8 2.3 2.5 2.5Exports of Goods and Services -4.5 1.9 1.7 3.9 6.4 6.3Imports of Goods and Services -1.9 1.1 0.3 2.9 5.4 6.3GDP 3.0 0.8 -1.0 0.9 2.6 3.1Industrial Production 0.4 -1.5 -2.7 0.4 2.2 1.5CPI 2.3 3.8 2.3 1.2 1.8 2.0Current Balance (% of GDP) -3.8 -2.5 -2.4 -2.2 -1.9 -2.0Government Budget (% of GDP) -2.7 -4.5 -6.8 -7.4 -6.3 -5.0Short-Term Interest Rates (%) 5.95 5.53 2.63 2.34 3.28 4.28Long-Term Interest Rates (%) 5.01 4.66 4.39 4.73 5.03 5.17Exchange Rate (US$ per £) 2.00 1.87 1.53 1.62 1.72 1.73Exchange Rate (Euro per £) 1.46 1.27 1.22 1.31 1.39 1.40
Forecast for UK(Annual percentage changes unless specified)
Sectors and Regions
32
Services an ever growing part of the economy
0
10
20
30
40
50
60
70
80
90
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
% GDP
Source: Oxford Economics
Services
ConstructionManufacturing
Forecast
33
…and an ever rising part of employment
0
10
20
30
40
50
60
70
80
90
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
% Employment
Source: Oxford Economics
Services
Construction
Manufacturing
Forecast
34
Finance & business growing within services
0
5
10
15
20
25
30
35
40
45
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
% Services
Source: Oxford Economics
Other
Business
Distribution
Forecast
CommunicationTransport Finance
GVA
35
…though business not finance for jobs
0
5
10
15
20
25
30
35
40
45
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
% Services
Source: Oxford Economics
Other
Distribution
Business
Forecast
CommunicationTransportFinance
employment
36
Finance & business worst hit by recession
(total employment change, 000s) 1978-08 1998-08 2008-10 2008-18Manufacturing -3977 -1382 -193 -674Other production -282 272 -142 74Financial & business services 3735 1508 -300 818Other private services 2888 1138 -197 416Public services 2425 1449 95 527Total 4789 2985 -737 1161
(average per year, 000s) 1978-08 1998-08 2008-10 2008-18Manufacturing -133 -138 -96 -67Other production -9 27 -71 7Financial & business services 124 151 -150 82Other private services 96 114 -99 42Public services 81 145 48 53Total 160 299 -368 116
UK employment change by broad sector (000’s)
Source: ONS; Oxford Economics forecasts
37
How are regional economies affected?
Type of impact Where would we expect biggest effect?
Financial services industry
Where greatest number of jobs are located
Construction Where housing starts and office building have been strongest
Housing Where price disequilibria have been greatest
Consumer Where there are highest real income effects, consumer debts, unemployment impacts
Population Where inward migration has been most driven by availability of jobs
Second-round effects
Where consumer-related industries and services are located; areas that supply most-affected regions
38
More like 1990s than 1980s
Impacts on total employment of each ‘recession’ (000’s)
1981-1983 1991-1993 2001-2003 2008-2010
South East -12 -89 3 -76London -142 -210 -20 -211Eastern 1 -55 68 -78South West -68 -76 43 -34West Midlands -75 -114 18 -66East Midlands -21 -76 16 -43Yorkshire & Humber -80 -53 86 -47North West -164 -94 94 -91North East -66 -21 40 -17Wales -58 -18 44 -20Scotland -82 -50 12 -36Northern Ireland -11 -6 23 -17UK -778 -864 429 -737
39
The forecast: Southern regions hit hardest by contraction in jobs
92
97
102
107
112
117
122
1990 1994 1998 2002 2006 2010 2014
Index (1990=100)
Source : Oxford Economics
South
NIWSMidlands
North
Total Employment in the regional groups (1990=100)
40
Services vital to North West economy, too…
Note: Other includes agriculture, extraction, utilities, financial services and public admin
Distribution & retail17%
Other personal services
6%Transport & comms
6%
Hotels & catering7%
Construction7%
Education8%
Other9%
Manufacturing12%
Health12%
Business services16%
Share of employment, 2008
41
…and critical to recovery from recession
(total employment change, 000s) 1978-08 1998-08 2008-10 2008-18Manufacturing -654 -174 -24 -88Other production -50 30 -14 6Financial & business services 347 178 -27 65Other private services 215 92 -29 34Public services 245 153 4 35Total 102 279 -91 52
(average per year, 000s) 1978-08 1998-08 2008-10 2008-18Manufacturing -22 -17 -12 -9Other production -2 3 -7 1Financial & business services 12 18 -13 6Other private services 7 9 -15 3Public services 8 15 2 4Total 3 28 -46 5
North West employment change by broad sector (000’s)
42
Conclusions
Recession seems inevitable for UK and other developed economies.
Severity will be affected by scale of consumer retrenchment.
But policy now heavily geared to supporting growth, and possible to see upsides as well as downsides to the forecast.
Services – and London – most heavily affected by slowdown, but services are also the key to recovery.
North West still expected to see appreciable jobs (and population) growth in the medium term.
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