Global & UK Macroeconomic Outlook · 2013. 2. 5. · Predictions for the UK economy in 2013 Exports will do better in 2013 Inflation will eventually move back to target….but not

Global & UK Macroeconomic

Outlook

6th February 2013

John Walker

[email protected]

World forecast

2011 2012 2013 2014 2015 2016 2017Real GDP North America

United States 1.8 2.3 2.3 3.1 3.3 2.9 2.8 Canada 2.6 2.0 1.7 2.9 2.8 2.6 2.6

Europe

Eurozone 1.5 -0.5 -0.2 1.1 1.4 1.5 1.6 Germany 3.1 0.9 0.7 1.9 1.7 1.6 1.4 France 1.7 0.0 0.0 1.1 1.2 1.3 1.4 Italy 0.6 -2.1 -1.2 0.3 1.1 1.2 1.3 EU27 1.6 -0.3 0.1 1.4 1.8 1.8 1.9

Asia

Japan -0.5 2.0 0.5 1.7 2.1 1.2 1.6 China 9.3 7.7 8.3 9.0 8.5 8.0 7.7 India 7.5 5.4 6.0 7.5 7.9 7.8 7.7

World 2.9 2.3 2.4 3.4 3.7 3.5 3.5

Summary of International Forecasts

Multiple Eurozone exits (30%)

■ Fiscal austerity in Greece becomes

unbearable; government falls and defaults

■ Financial contagion spreads

■ Run on banks in peripherals leading to

credit crunch,

■ Cyprus, Portugal, Spain, Italy & Ireland

also forced out of Eurozone.

China hard landing (15%)

■ Commercial property crash & external

weakness leads to banking sector

stress

■ Flight from risk leads to falling share &

property prices

■ Investment slumps in China as

government recapitalises banks

■ Asian supply chain affected as domestic

engine of growth stalls

Oxford Forecast (45%)

■ Eurozone avoids breakup. ECB and

governments take significant steps to

ensure Eurozone survival

■ Risk premia fall, and consumer and

business confidence gradually recover.

■ Recovery limited by high debt, weak

job growth and fiscal retrenchment

■ EMs robust as policy eases and

growing middle class support

consumer spending and trade

US fiscal cliff (10%)

■ Stalemate in the House implies much

larger fiscal tightening than in baseline

■ Business and consumer confidence

negatively affected

■ Additional QE and weaker US$ to

provide only partial offsets

■ Trade and financial linkages cause

global slowdown

In mid 2012, risks were skewed to the downside..

Eurozone exits in 2014 (15%)

■ Fiscal austerity in peripheral countries

becomes unbearable

■ No growth pushes unemployment yet

higher. Pro-exit parties gain popularity.

■ No real progress on banking and fiscal

union,

■ 6 countries exit Eurozone in 2014 Q1.

Faster upturns in US & EMs (15%)

■ Resolution of outstanding fiscal issues

encourages investment and hiring in the

US.

■ Momentum in EMs builds as trade picks

up and accommodating policy feeds

through

■ Business and consumer confidence rise

as conditions improve.

Oxford Forecast (60%)

■ Steps to ensure Eurozone survival are

taken, although they are not enough to

kick start significant growth.

■ Risk premia fall, and consumer and

business confidence gradually recover.

■ Recovery limited by public and private

deleveraging and weak job growth

■ EMs robust as policy eases and

growing middle class support

consumer spending and trade

Middle East tensions (5%)

■ Political tensions escalate in Egypt,

Syria and Iran

■ Concerns about stability in the region

push oil prices to over $200/barrel

■ Business and consumer confidence hit

by energy shock

■ Political situation stabilises gradually.

Oil prices return to baseline by 2015.

…but now the risks are much more balanced

UK vs US – GDP growth

-8

-6

-4

-2

0

2

4

6

2000 2002 2004 2006 2008 2010 2012 2014 2016

GDP growth% year

Source : Oxford Economics/ Haver Analytics

UKUS

Forecast

As expected, 2012 was a difficult year…

0.0

0.3

-5

-4

-3

-2

-1

0

1

2

3

4

2005 2006 2007 2008 2009 2010 2011 2012

UK: GDP% year

Source : Oxford Economics

Jan12 fcst

GDP outturn

…mainly due to poor export performance

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

Consumer

spending

Investment Govt.

consumption

Inventories Net trade

UK: Contributions to GDP growth (2012)%pts

Source : Oxford Economics/Haver Analytics

Business

Residential

Govt

Little momentum heading into 2013

30

35

40

45

50

55

60

65

2005 2006 2007 2008 2009 2010 2011 2012 2013

UK: Purchasing managers' surveys% balance*

Source : CIPS/Markit

Manufacturing

activity

Services business

activity

*value over 50 indicates

rising activity

Predictions for the UK economy in 2013

Exports to do be better in 2013

UK vs US – Exports

-20

-15

-10

-5

0

5

10

15

20

2000 2002 2004 2006 2008 2010 2012 2014 2016

Export volume growth% year


US

UK

Forecast

Eurozone weakness will constrain export pickup

-15

-10

-5

0

5

10

15

2000 2002 2004 2006 2008 2010 2012 2014 2016

World trade Exports

UK: World trade and exports% year


Forecast


Exports to do be better in 2013

Inflation will eventually move back to target….but not until the

latter part of the year

Inflation remained stubbornly high in 2012H2

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012

UK: Contributions to CPI inflation% year


Transport

Food

Housing

costsOther

`

Stable oil prices should help reduce inflation…

40

50

60

70

80

90

100

110

120

130

2005 2006 2007 2008 2009 2010 2011 2012 2013

World: Oil price$ per barrel


F'cast

70

80

90

100

110

120

130

140

150

2005 2006 2007 2008 2009 2010 2011 2012 2013

UK: Unleaded petrol pricespence per litre


F'cast

…but will initially be offset by food and utilities…

0

2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 2011 2012 2013

UK: Food prices% year


F'cast

-20

-10

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010 2011 2012 2013

UK: Domestic energy prices% year


F'castGas

Electricity

…so it will be end-13 before CPI is back at 2%

0

1

2

3

4

5

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

% year

2% target

CPI inflation

UK: Inflation relative to target

Source: Oxford Economics

Forecast


Exports will do better in 2013



Consumer spending to grow modestly again this year

Real incomes held up surprisingly well in 2012

A sharp rise in employment, plus generous uprating of state benefits more

than offset the impact of below-inflation earnings growth

0

1

2

3

4

5

6

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

UK: Real wages% year

Source : Haver Analytics

CPI inflation

Earnings

(regular pay)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

UK: Real personal disposable income% year


Consumers are still looking to deleverage

100

110

120

130

140

150

160

170

180

1990 1995 2000 2005 2010 2015

UK: Household debt-to-income ratio% of household disposable income


Forecast






Housing market activity will increase, partly due to FLS. But

prices will continue to drift downwards

Banks are bullish about mortgage availability…

-20

-10

0

10

20

30

40

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

2010 2011 2012 2013

UK: Mortgage availability

Source : Bank of England Credit Conditions Survey

% balance : loosening (+) / tightening (-)

*The single datapoints represent 3 month

forecasts, while the columns represent actual data

…but impact on lending has been small so far…

-2

0

2

4

6

8

10

12

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

0

20

40

60

80

100

120

140

Source: Haver Analytics

£bn 000s

Number of loans approved

for house purchase

(RHS)

Net mortgage

lending (LHS)

UK: Housing market activity

UK vs US – Value added in construction

-20

-15

-10

-5

0

5

10

15

2000 2002 2004 2006 2008 2010 2012 2014 2016

GVA in construction% year


USUK

Forecast








Firms will remain reluctant to commit funds to investment

because of on-going uncertainty around the outlook

Firms are still awash with cash…

-2

-1

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012

UK: PNFC financial balance

% of GDP, 4QMA


…but remain reluctant to spend…

-5

-4

-3

-2

-1

0

1

2

3

4

2000 2002 2004 2006 2008 2010 2012

UK:BoE agents' survey: Investment intentions % balance


Manufacturing

Services

…and investment is likely to continue to lag

70

75

80

85

90

95

100

105

110

115

120

0 2 4 6 8 10 12 14 16 18 20 22 24

UK: Business investment across cyclesRebased, cyclical peak = 100

Source : Oxford Economics Quarters from peak

2007Q4

1979Q3

1989Q3










The Chancellor will continue to follow ‘Plan A’ despite further

weak growth and failing to achieve OBR’s fiscal forecasts

UK vs US – Fiscal tightening

-0.5

-2.0

-2.5

1.2

1.9

1.2

-0.6

-2.2

-2.9

-0.3

0.81.1

-4

-3

-2

-1

0

1

2

3

2007 2008 2009 2010 2011 2012

UK

US

Fiscal tightening*

% of potential GDP

Source : IMF

*positive value indicates fiscal tightening

UK vs US – Government deficit

-14

-12

-10

-8

-6

-4

-2

0

2

4

2000 2002 2004 2006 2008 2010 2012 2014 2016

Government deficit% of GDP


US

UK

Forecast

Boost to capital spending was too timid

Baseline includes

£5bn of extra

capital spending

between 2013-15,

paid for by deeper

current spending

cuts

Scenario shows

impact of £10bn of

additional capital

spending in both

2013/14 and

2014/15, paid for

through additional

borrowing

0.0

1.0

2.1

2.5

0.0

1.5

2.6

2.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014 2015

Baseline Scenario

UK: GDP% year











The Chancellor will continue to follow ‘Plan A’ despite further

weak growth and failing to achieve OBR’s fiscal forecasts

The MPC appears to have lost faith in QE and looks likely to

sit on its hands…at least until the change of Governor

Growth will struggle to get above 1% in 2013

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1997-

2007

2010 2011 2012 2013 2014 2015

Consumer spending Investment

Govt. consumption Inventories

Net trade

UK: Contributions to GDP growth%pts


UK forecast

2011 2012 2013 2014 2015 2016 2017Domestic Demand -0.6 1.0 1.3 1.8 2.1 2.3 2.4

Private Consumption -1.3 0.9 1.2 2.0 2.4 2.8 3.0

Fixed Investment -2.9 0.0 2.8 5.6 5.6 5.8 5.8

Stockbuilding (% of GDP) 0.4 0.1 0.3 0.3 0.3 0.3 0.3

Government Consumption -0.1 2.8 -0.3 -1.4 -1.3 -1.6 -2.2

Exports of Goods and Services 4.5 -0.4 2.1 4.8 4.9 5.4 5.6

Imports of Goods and Services 0.5 2.3 3.0 3.8 3.7 4.0 4.0

GDP 0.9 0.0 1.0 2.1 2.5 2.8 2.9

Industrial Production -0.8 -2.4 -1.0 1.2 1.1 1.3 1.4

CPI 4.5 2.8 2.4 1.6 1.5 1.6 1.7

Current Balance (% of GDP) -1.3 -3.6 -3.3 -3.1 -2.9 -2.4 -1.9

Short-Term Interest Rates (%) 0.9 0.8 0.5 0.5 0.5 0.7 1.6

Long-Term Interest Rates (%) 3.1 1.9 2.1 2.4 2.6 3.0 3.6

Exchange Rate (vs US$) 1.60 1.59 1.58 1.53 1.53 1.54 1.54

Exchange Rate (Euro per £) 1.15 1.23 1.24 1.27 1.31 1.31 1.32

Output gap (% of potential GDP) -2.9 -5.0 -5.4 -5.2 -4.6 -4.0 -3.2

Forecast for UK

(Annual percentage changes unless specified)

Flat GDP and strong employment growth…

28.7

28.8

28.9

29.0

29.1

29.2

29.3

29.4

29.5

29.6

29.7

29.8

2008 2009 2010 2011 2012

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

UK: Labour marketEmployment (000s)


Employment

(LHS)

Unemployment (000s)

Unemployment

(RHS)

…have left us with a productivity puzzle

-1

0

1

2

3

4

5

1975 1980 1985 1990 1995 2000 2005 2010

-3.25

-1.25

0.75

2.75

UK: GDP and employment growth (5yr MA)GDP growth, % year

Source : Haver Analytics / Oxford Economics

GDP growth

(LHS)

Employment growth

(RHS)

Employment growth, % year

75

80

85

90

95

100

105

110

115

120

1995 1997 1999 2001 2003 2005 2007 2009 2011

UK: Output per worker2009=100


Actual

Pre-recession

trend

14%

Why could productivity have been so weak?

Factor substitution – preference of labour for capital?

Not large – little substitutability between labour and capital in most

industries

Labour hoarding, made possible by low earnings growth?

Maybe at the start of the recession, but why would firms be taking

new staff on now?

Zombie companies tying up capital and employing staff?

Again may contribute to some labour hoarding but can’t explain new

jobs

Given the above and comparing UK with other countries

suggest that there may well be some under-reporting of GDP

Deflators are probably too high, particularly for services activity

Is the drop in UK productivity plausible?

90

92

94

96

98

100

102

104

106

108

110

2008 2009 2010 2011 2012

UK US

Germany France

UK: Output per worker across countriesIndex, 2008Q1 = 100


Why has the UK recovery been so weak?

Degree to which GDP is below the long-term trend 14

Impact of the financial crisis on potential output

Impact on capital stock 1

Impact on growth in the labour supply 0

Impact on total factor productivity 3-5

Under recording of the current level of GDP 3

Spare capacity 5-7

Why are we below capacity?

Fiscal tightening 3

Tight credit conditions 1

Weak Eurozone demand 1

Slow adjustment 1-2

Note: Figures may not sum due to rounding

Source: Oxford Economics

Decomposing UK GDP in 2012

per cent

Thank you

The UK deflators look high

98

100

102

104

106

108

110

112

2008 2009 2010 2011 2012

UK - basic prices

UK - market prices

US - market prices

GDP deflator2008Q1 = 100


UK vs US – Wage inflation

-2

-1

0

1

2

3

4

5

6

7

8

2000 2002 2004 2006 2008 2010 2012 2014 2016

Wage inflation% year


US

UK

Forecast

Documents

Global & UK Macroeconomic Outlook · 2013. 2. 5. · Predictions for the UK economy in 2013 Exports will do better in 2013 Inflation will eventually move back to target….but not