It’s after the election when things get really interesting……

© centre for economics and business research ltd

Douglas McWilliams

centre for economics and business research ltd

10 May 2010

It’s after the election when things get really interesting……

the prospects service

Objectives

• To present and discuss cebr’s forecasts for the economy post election


Outline

• The world economic background

• UK prospects

• The UK fiscal challenge

• A hung parliament

• Conclusions


Why has the world economy turned round?

• The inbuilt dynamism of the emerging economies

• Governments – after trying everything else – eventually prescribed the right medicine

• An inventory downturn must eventually run out of steam


Western world share of world GDP

40%

45%

50%

55%

60%

65%

70%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Western world has fallen below 50 per cent of world GDP


Comparison of GDP in dollars

US Jap Chi Ger Ita Fra UK Esp Rus Bra Can Aus Ind2000 9951 4667 1198 1906 1101 1333 1481 582 260 644 725 3902001 10286 4095 1325 1893 1118 1341 1471 610 307 554 715 3682002 10642 3918 1454 2024 1223 1463 1615 689 345 506 735 4132003 11142 4229 1641 2447 1510 1804 1863 885 431 552 866 5282004 11868 4606 1932 2749 1730 2061 2204 1046 592 664 992 6412005 12638 4552 2236 2793 1781 2148 2283 1132 764 882 1134 7132006 13399 4363 2658 2920 1865 2270 2443 1236 989 1089 1278 7552007 14078 4380 3382 3328 2118 2598 2800 1443 1294 1334 1427 9102008 14441 4911 4327 3673 2314 2867 2680 1602 1677 1550 1499 1013 12202009 14266 5049 4758 3534 2282 2878 2198 1571 1439 1728 1448 920 12512010 14704 5187 5263 3541 2313 2923 2189 1571 1703 1923 1558 983 14042011 15327 5267 5844 3556 2335 2990 2194 1575 1975 2124 1703 1082 15762012 16009 5411 6524 3589 2373 3071 2212 1591 2274 2345 1857 1206 17692013 16729 5591 7288 3633 2423 3164 2233 1618 2616 2595 2014 1346 19862014 17419 5792 8283 3682 2488 3263 2253 1656 3040 2872 2174 1481 22292015 18290 5965 8946 3828 2562 3376 2272 1705 3382 3194 2408 1664 2502


World economy rankings

US Jap Chi Ger Ita Fra UK Esp Rus Bra Can Aus Ind2000 1 2 6 3 7 5 4 10 12 9 8 112001 1 2 6 3 7 5 4 9 12 10 8 112002 1 2 6 3 7 5 4 9 12 10 8 112003 1 2 6 3 7 5 4 8 12 10 9 112004 1 2 6 3 7 5 4 8 12 10 9 112005 1 2 5 3 7 6 4 9 11 10 8 122006 1 2 4 3 7 6 5 9 11 10 8 122007 1 2 3 4 7 6 5 8 11 10 9 122008 1 2 3 4 7 5 6 9 8 10 11 13 122009 1 2 3 4 6 5 7 9 11 8 10 13 122010 1 3 2 4 6 5 7 10 9 8 11 13 122011 1 3 2 4 6 5 7 12 9 8 10 13 112012 1 3 2 4 6 5 9 12 8 7 10 13 112013 1 3 2 4 8 5 9 12 6 7 10 13 112014 1 3 2 4 8 5 9 12 6 7 11 13 102015 1 3 2 4 8 6 11 12 5 7 10 13 9


-2%

-1%

0%

1%

2%

3%

4%

5%

1998 2000 2002 2004 2006 2008 2010 2012 2014

WORLD ECONOMIC OUTLOOK

World real GDP growth, annual percentage change

The world economy is bouncing back but will not return to mid 2000s growth


We are much more pessimistic than Mr Darling about likely UK growth post 2010

Gross domestic product

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

2000 2002 2004 2006 2008 2010 2012 2014

cebr Treasury

Real gross domestic product, annual percentage change


Earnings growth to hit historic low in 2009 and remain steady

0

1

2

3

4

5

6

7

8

9

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

Average earnings (incl. bonuses), annual percentage change

Average earnings


Saving highest in 11 years as households pay off debt mountain

-2

0

2

4

6

8

10

12

14

16

1994 1998 2002 2006 2010 2014

Savings ratio Household debt

Household savings ratio, per cent of total household resourcesand growth in overall household debt, annual percentage change

Consumer spending and saving


Consumer recession is over but cautious outlook beyond Christmas bonanza

-4

-3

-2

-1

0

1

2

3

4

5

6

1999 2001 2003 2005 2007 2009 2011 2013

Consumer spending, annual percentage growth

Consumer spending and saving


-2

-1

0

1

2

3

4

5

6F

eb

-00

Fe

b-0

2

Fe

b-0

4

Fe

b-0

6

Fe

b-0

8

Fe

b-1

0

Fe

b-1

2

Fe

b-1

4

CPI RPI

Consumer price inflation, quarterly annual percentage change

InflationInflation rise largely driven by VAT reversal but oil and sterling are risks


Monetary policy looser for longer to counteract fiscal contraction

0%

1%

2%

3%

4%

5%

6%

7%

Ma

r-0

0

Ma

r-0

2

Ma

r-0

4

Ma

r-0

6

Ma

r-0

8

Ma

r-1

0

Ma

r-1

2

Ma

r-1

4

Bank of England base interest rate, percentage

Interest rates


If you plug in our growth forecasts then borrowing falls very slowly

PUBLIC FINANCES OUTLOOK

-200

-150

-100

-50

0

501

99

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

cebr forecast Treasury forecast

Government surplus on current Budget, £ billion, financial year


If you plug in our growth forecasts then borrowing falls very slowly

PUBLIC FINANCES OUTLOOK

-200

-150

-100

-50

0

501

99

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

cebr forecast Treasury forecast

Government net surplus, £ billion, financial year


Public spending as a share of GDP in the UK has shot up both in absolute terms and compared with other countries

30

35

40

45

50

55

United Kingdom Eurozone US

Total public outlays as percentage of GDP – source OECD


…and is now higher than in any of the Southern European EU member states….

30

35

40

45

50

55

60

United Kingdom Greece Italy Spain Portugal

Total public outlays as percentage of GDP – source OECD


Had there been a small Tory majority…• Expect tough action to deal with the budget deficit before

end July

• Probably 80-20 split between spending cuts and tax increases

• NHS and DFID ring fenced means tougher cuts elsewhere

• Action on pay, pensions and public sector charges as well as total spending

• 20% VAT + higher excise duties?

• Probably some attempt to build consensus but suspect that it will be hard to achieve

• ‘Enterprise package’ plus rescinding of part of NI increase

• Welfare reform

• Education reform


A hung parliament…what we said before the election

• Depends on who gets how many seats

• Calculations assume Labour and Tories neck and neck and some kind of Lib Lab pact

• Bond markets will force fiscal action – probably by showing a market reaction

• Could be messy but not necessarily

• Assume 60-40 spending cut tax rise split

• Not much difference ultimately between scale or timing of moves – major difference from content

• Attempt to introduce PR – will the public support it in a referendum?


Likely to be an early forex impact from hung parliament but effects likely to wear off

€ 0.9

€ 1.0

€ 1.1

€ 1.2

€ 1.3

€ 1.4

€ 1.5

€ 1.6

20

10

20

11

20

12

20

13

Small tory majority Hung parliament best caseHung parliament worst case

Sterling euro exchange rate

Exchange rates


If a hung parliament frightens the markets, the MPC may have to raise rates temporarily

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.02

01

0

20

11

20

12

20

13


Bank of England base rate

Interest rates


…and the bond market could be especially worried initially

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.02

01

0

20

11

20

12

20

13


Yield on 10 yr UK government gilt

Interest rates


But growth would not be much affected unless there is a severe crisis – sluggish growth on all scenarios

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

20

10

20

11

20

12

20

13


Yield on 10 yr UK government gilt


Conclusions

• World economy definitely in recovery mode

• Multi-speed world recovery; shift from West to East

• UK fiscal crisis will have to be addressed, either voluntarily or after pressure from bond and forex markets

• £40-60bn of fiscal action required additional to announcements up to and including the March Budget

• Tories seem prepared to grasp the nettle and take early action

• Suspect that action may be slower with hung parliament

• But in the end the main difference likely to be in the tax spending mix

© centre for economics and business research ltd

Douglas McWilliams

centre for economics and business research ltd

[email protected]

It’s after the election when things get really interesting……

Documents

It’s after the election when things get really interesting……