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Economy & Pensions UpdateWith James Sproule and Malcolm Small
Institute of DirectorsWednesday 10th September
Macro Economic Outlook
GDP – Interest Rates - Thresholds of Demand
September 2014
James Sproule, Chief Economist
Institute of Directors [email protected]
@jamesrsproule
Contents
• Economic forecasts
• Interest Rates
• Thresholds of Demand
Addicted to debt – Hampered by bureaucracy
UK economic forecasts remain too calm
Source: ONS, HM Treasury Consensus
UK GDP (HM Treasury consensus survey forecast)
Economic forecasts have a strong tendency to underestimate volatilityConsensus estimate real trend rate of UK growth to be ~2.0% Disaggregating consensus does not significantly raise forecast volatility Conclusions Look to economists for a trendAny trend forecast has to stack up with expected changes that can be observed (demographics etc.)
Forecast -8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
2000
2002
2004
2006
2008
2010
2012
2014
2016
GDP
Consensus Aug 2006
Consensus Aug 2009
Consensus Aug 13
Consensus Aug 14
UK CPI
Source: ONS, IoD Policy Unit
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
1999 2001 2003 2005 2007 2009 2011 2013
Misc Resturants
Education Recreation
Coms Transport
Health Furniture
Housing & H Coss Clothing
Alcohol Food & Drink
UK economic forecasts• GDP growth looking set to rise modestly above trend (2.5%-3.0%) for next two years
• Debt consolidation continuing, corporates and banks doing well, consumers and government debt consolidation continues
• Exporters used weak sterling to increase margins rather than expand market share, this contributed to rapid corporate debt consolidation
• UK Directors are expecting to increase staff pay modestly underpinning consumer confidence
• Inflation remains subdued.
• Pay remains very tied to firm performance
• Housing inflation is not uniform and can be addressed by other means
• UK productivity remains middling• UK productivity in line with Italy and Canada, below Germany and the US• Service sector has in recent years seen substantial rises in productivity, although public sector
continues to lag • UK workforce participation rates remain high (73%), this has the effect of lowering aggregate UK
productivity measures
• IoD has called for rise in UK interest rates in autumn/winter 2014/2015• BoE has called present situation “Extraordinary Monetary Policy”, economy can now sustain
normal rate environment • Rise in rates from 0.5% necessary to allow monetary policy lever to function properly
0
2
4
6
8
10
12
14
16
18
UK Interest rates
Source: BoE
UK Bank of England Base Rates
• Bank of England base rates are at 0.5%, the lowest in history
• Monetary policy remains ineffective as rates are too low to allow for stimulus
UK Interest rates – cont
Source: BoE, St Louis Fed Reserve, IoD Policy Unit
US Credit Spreads
• Long term time value of money varies with inflationary expectations
• Bank of England sets overnight rate, markets determine shape of the curve from that point
UK 10 Y Gilt Curve
0
2
4
6
8
10
12
141990 2000
2010 2014
0
5
10
15
20
25
2004 2006 2008 2010 2012 2014
AAA
AA
A
BBB
BB
B
• Corporate borrowing is at a (highly variable) premium above base rates.
• Spreads move in response to market sentiment and investors outlook
UK Interest outlook
• Bank of England determines base rates - a single point in a highly complex picture.
• Inflationary expectations can be shaped by a responsible governments and can destroy irresponsible governments.
• Investor confidence – reflecting broad risk assessments – is the key to interest rate spreads. Spreads matter more to businesses, particularly SME businesses than base rates.
Global opportunities abound – But many will never see them
Stages of Economic Development
Low Cost Labour•Business friendly government encourages Multi National Corp (MNC) investment •MNC’s seeks to lower costs of commoditised products and services •Intellectual capital transfer is low •MNC’s can cope with uncertainty/SME can not
Secure Property Rights•Politicians are brought fully under the law •Secure property rights allow for development of domestic business base •Basic components& services supplied locally
Intellectual Development •Local value added goods and services are brought to market •Tech development in domestic market •Fading dependence on FDI, domestic demand is increasingly sophisticated
GD
P/H
ead
of
~$2
500
GD
P/H
ead
of
~$7
500
Time to Increase GDP
76
52
37
19
16
13
15
14
11
17
8
7
103
82
60
40
Pre 1875
1876-1900
1901-1950
Post 1951
GDP from $2,500 to $5,000
GDP from $5,000 to $7,500
GDP from $7,500 to $10,000
CountriesPre 1875 Australia, UK, Netherlands, USA 1876-1900 France, Germany, Canada, Argentina 1901-1950 Sweden, Italy, Ireland, Spain, Chile, Japan, Russia (USSR), South Africa Post 1950 Poland, Mexico, Colombia, Singapore, Turkey, Brazil, South Korea, Malaysia, Thailand, China
Thresholds of Demand
Source: IMF, ITU, CIA, IoD Policy Unit
Car
Broadband
Internet
TV
Radio
Fix Teleco
Air Travel
Credit cards
0%
20%
40%
60%
80%
100%
120%
140%
0
5,00
0
10,0
00
15,0
00
20,0
00
25,0
00
30,0
00
35,0
00
40,0
00
45,0
00
50,0
00
Pene
trati
on ra
te
GDP - US$/Head Mobile (2012)
Mobile (2007)
Mobile (2002)
0%
20%
40%
60%
80%
100%
120%
140%
0
5,00
0
10,0
00
15,0
00
20,0
00
25,0
00
30,0
00
35,0
00
40,0
00
45,0
00
50,0
00
Pene
trati
on ra
te
GDP - US$/Head
China
India
Indonesia
Nigeria
Argentina
Columbia
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
GD
P $/
Hea
d
GDP CAGR
Phase I - 2010
Phase I - 2019
Phase II - 2010
Phase II - 2019
Internet
TV & Mobile (2002)
Mobile (2010)
Air Travel
Credit Cards & Fix Teleco
New Car
Radio
Development and Thresholds of Demand
Source: IMF, IoD Policy Unit
Development and Thresholds of Demand
• A degree of reality is necessary in making assumptions about future growth. • The world is rarely so predictable that straight line growth forecasts are a
reliable guide to much of anything.
• Sustainable economic growth naturally takes economies and societies through a number of significant changes.
• Many vested interests will find these transitions difficult; it should not be assumed that what is best for an economy overall will prevail.
• What economic growth means to individual businesses and industries varies, and there are clear points of increasing demand.
• These thresholds are dynamic, but they do offer clear guidelines as to where potential business opportunities are likely to arise.
• Over the next decade a number of significant markets, Nigeria and India to name but two, are going to be seeing strong growth in communications and media, while demand for air travel in China is (hopefully) set to explode.
Pensions
“Why Pensions Matter and the Policy Agenda”
September 2014
Malcolm SmallSenior Adviser, Financial Services
PolicyInstitute of Directors
What We’ll Be Looking At:
• Why Pensions Are Important• What IoD Has Argued For In Pensions• What We Will Be Arguing For In Future• Some Thoughts On Longevity
But First, A Story About Steam Engines And A Watch…
WHY PENSIONS ARE IMPORTANT TO BUSINESS
• £2.4 Trillion Asset Pool• Pension Funds Are Major Shareholders• Employees Need To Retire• Employers Need Them To Do So• Role Of The State Must Shrink• Elder Care Cannot Fall On Business
What We Have Argued For
• Raise State Pension Age Towards 70 And Beyond. Sorry.
• Provide A Decent, Flat Rate, Basic State Pension
• Reform The Structure Of A “Pension” To Make It Attractive Again
• Support Older People To Work Longer
What We Will Be Arguing For
• Abolish The Lifetime Allowance• Keep Higher Rate Tax Relief On Contributions• Keep Supporting Older Workers/Entrepreneurs• Views Please – Compulsory Saving?• Views Please – Tax Relief?
Longevity 1
• Average Male Life Expectancy Now 80 – Was 66 In 1948
• Male Age 65 = 17 Years Life Expectancy• Female Age 65 = 20 Year Life Expectancy• But Healthy Life Expectancy Just 13 Years And
15 Years Respectively
Longevity 2
• Male 65 Cohort Life Expectancy Forecast To Be 25 Years By 2051
• Females 28 Years• Population Aged 80(+) To Grow From 2.8 Million In 2008
* To 5.8 Million In 2033
* To 10.6 Million In 2083• Number Of People Over S.P.A. Will Increase 32% By
2033• But Number Of Under 16s Will Only Increase By 10%
• Who Is Going To Pay?
Longevity 3
• And It Could Get Even More Interesting
• Who Would Want To Take A Bet?
Conclusions
• Pensions Are Important To Business• They Will Become More Important• IoD Is Having Impacts On Policy, And Will Have
More• Longevity Is The “Elephant In The Room”
Your IoD Services
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