UK Economic Outlook: What will drive future growth?
25th November 2014
Richard Holt
Head of Global Cities Research
1 Recent trends
Data revisions have ‘improved’ UK’s growth
92
94
96
98
100
102
104
2006 2007 2008 2009 2010 2011 2012 2013 2014
UK: GDP revisions , rebased Q1 2008 = 100
Source : Haver Analytics
New data
Old data
Business momentum across sectors
25
30
35
40
45
50
55
60
65
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
UK: Purchasing managers surveys, % balance
Source : CIPS/Markit
Construction activity
Manufacturingactivity
Services businessactivity
Demand is strong & well balanced (domestically)
-1.0
-0.5
0.0
0.5
1.0
1.5
Consumerspending
Investment Govt.consumption
Inventories Net trade
UK: Contributions to annual GDP growth Q2 2014, %pts
Source : Haver Analytics
Business
Residential
Government
2 Investment
Less need for catch up in business investment
70
75
80
85
90
95
100
105
110
2006 2007 2008 2009 2010 2011 2012 2013 2014
UK: Business investment revisionsRebased, Q1 2008 = 100
Source : Haver Analytics
New
Old
But corporate profitability looking good
-60
-40
-20
0
20
40
60
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Manufacturing Services
UK: British Chambers of Commerce survey -confidence in profitability, % balance
Source : Haver Analytics
So manufacturers (others) plan to invest
-60
-40
-20
0
20
40
60
2001 2003 2005 2007 2009 2011 2013
UK: Manufacturing profitability expectations and investment intentions, % balance
Source: Haver Analytics/BCC
Profit expectations
Plant/equipment investment intentions
Fixed investment growing quite fast this year
2013: up 3.2%
2014: up 8.5%
Then gradually slows to 4½% growth by 2018
3 Trade
-8
-6
-4
-2
0
2
4
6
1999 2001 2003 2005 2007 2009 2011 2013
Source : Oxford Economics/Haver Analytics
Eurozone: GDP, % year
France
Germany
Italy
The Eurozone recovery has stalled
China is slowing down
0
5
10
15
20
25
40
45
50
55
60
65
2008 2010 2012 2014
China: Industrial production and PMI survey% balance
Source : Oxford Economics/Haver Analytics
Industrial production (RHS)
HSBC PMI survey (LHS)
%, y/y
Those & other upsets are hurting UK exports
-50
-40
-30
-20
-10
0
10
20
30
40
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: BCC
UK: British Chambers of Commerce export orders, % balance
Services
Manufacturing
Long-term view: China may continue to slow
-10
-5
0
5
10
15
20
1961 1969 1977 1985 1993 2001 2009
Korea, Taiwan and China compared, % year
Source : Oxford Economics/Haver Analytics
Taiwan 1951-2003
Korea 1961-2013
Source : Oxford Economics/Haver Analytics
China 1979-2013
World economy: moderate long-term growth
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
1996 2000 2004 2008 2012 2016 2020 2024
World: GDP growth %
Source : Oxford Economics
Developing Economies
Advanced Economies
Exports weak this year but improve next
Exports of goods & services 0.4% down this year in
real terms
2015 up 4.4%
Subsequent years 5% to 6% a year growth
4 Consumption
2014 real incomes driven by rising employment
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
1998-07 2011 2012 2013 2014(f)
Social benefits
Wage inflation
Employmentgrowth
Other income
Income tax &NICs
Price inflation
UK: Decomposing real income growth, %pts
Source : Haver Analytics
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
2008 2009 2010 2011 2012 2013 2014 2015
GDP
Employment
Productivity
UK: GDP, employment & productivity % growth
Source : Oxford Economics
In 2015 productivity gains will slow this down
Evidence on wages growth v mixed
-4
-3
-2
-1
0
1
2
3
-2
-1
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
UK: Different measures of wage growth, % year
Source : Bank of England
Differences from averages since 1998(number of standard deviations)
-4
-3
-2
-1
0
1
2
3
-2
-1
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Private sector AWE growth (LHS) IDS wage settlements (LHS)
National accounts (LHS) Agents' survey (RHS)
BCC survey (RHS) REC (RHS)
UK: Different measures of wage growth, % year
Source : Bank of England
Differences from averages since 1998(number of standard deviations)
-4
-3
-2
-1
0
1
2
3
-2
-1
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Private sector AWE growth (LHS) IDS wage settlements (LHS)
National accounts (LHS) Agents' survey (RHS)
BCC survey (RHS) REC (RHS)
UK: Different measures of wage growth, % year
Source : Bank of England
Differences from averages since 1998(number of standard deviations)
-4
-3
-2
-1
0
1
2
3
-2
-1
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Private sector AWE growth (LHS) IDS wage settlements (LHS)
National accounts (LHS) Agents' survey (RHS)
BCC survey (RHS) REC (RHS)
UK: Different measures of wage growth, % year
Source : Bank of England
Differences from averages since 1998(number of standard deviations)
-4
-3
-2
-1
0
1
2
3
-2
-1
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Private sector AWE growth (LHS) IDS wage settlements (LHS)
National accounts (LHS) Agents' survey (RHS)
BCC survey (RHS) REC (RHS)
UK: Different measures of wage growth, % year
Source : Bank of England
Differences from averages since 1998(number of standard deviations)
-4
-3
-2
-1
0
1
2
3
-2
-1
0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Private sector AWE growth (LHS) IDS wage settlements (LHS)
National accounts (LHS) Agents' survey (RHS)
BCC survey (RHS) REC (RHS)
UK: Different measures of wage growth, % year
Source : Bank of England
Differences from averages since 1998(number of standard deviations)
But fundamentals should push wages up
-5
-4
-3
-2
-1
0
1
2
3
-4
-2
0
2
4
6
8
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
UK: Earnings growth & recruitment difficulties% year
Source : Haver Analytics
Average weekly earnings -private sector
(LHS)
BoE agents -recruitment difficulties
(RHS)
% balance
Meanwhile oil prices will help to keep inflation low
50
55
60
65
70
75
80
80
85
90
95
100
105
110
115
120
125
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14
$ per barrel (LHS)
£ per barrel (RHS)
UK: Brent Crude oil price$ per barrel
Source : Haver Analytics
£ per barrel
So sustained real wage growth in prospect
-2
-1
0
1
2
3
4
5
6
2002 2004 2006 2008 2010 2012 2014 2016 2018
CPI inflation
Source: Oxford Economics
Average earnings
Forecast
UK: Earnings & inflation, % year
Steady not spectacular consumer spending rises
1.6% growth last year, 2.1% this year, then 2.3%, then 2.2%, 2.5%, 2.6%...
94
96
98
100
102
104
106
108
110
112
2013 2014 2015 2016 2017 2018
UK: Consumer spending (real), 2013=100
Source : Oxford Economics
5 Fiscal & monetary policies
2014/15: winners/losers from tax/benefit changes
-3
-2
-1
0
1
2
1 2 3 4 5 6 7 8 9 10 All
Direct tax Indirect tax Tax credits & benefits Overall
UK: Cumulative impact of all tax & benefit changes in 2014/15 as a % of 2014/15 income %pts
Source : HM TreasuryIncome decile
But big government spending cuts still to come
-4
-2
0
2
4
6
8
06-07 08-09 10-11 12-13 14-15 16-17 18-19
Source : Oxford Economics/HMT/OBR
UK: Departmental current spending 2006-07 to 2018-19
However, MPC remains dovish
Feb Mar Apr May Jun Jul Aug Sep Oct Nov
UK: MPC sentiment tracker
More dovish
Source : Oxford Economics
More hawkish
Forward guidance v2 launched
Dovish Inflation Report
Carney Mansion House speech & Miles
Times interview
Weale FT interview
Carney @ TSC 'unreliable boyfriend'
Hawkish July minutes & Carney Edinburgh
speech
Dovish Inflation Report
2 votes for a rate hike & Carney Sunday Times
interview
Haldane speech
September minutes
Very dovish Inflation Report
November minutes
So first interest rate hike a good way off
0
1
2
3
4
5
6
7
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: Oxford Economics
UK: Nominal interest rates, %
Long rates
Short rates
Forecast
Government spending is going negative
Government consumption rises 1% this year, flat in 2015, then steadily falls by about 1% a year for several years at least
6 Fundamentals
-150,000
-100,000
-50,000
0
50,000
100,000
1980 1984 1988 1992 1996 2000 2004 2008 2012
Net Interest, profit and dividends
Transfers, net current account transfers
Current account
Trade balance - goods
Trade balance - services
Exports, £m
Source : ONS
Exports: huge reliance on net exports of services
Key export sectors
0
10
20
30
40
50
60
70
80
Services Machinery Chemicals Motorvehicles
UK: Exports of goods and services 2014, £ bn
Source : Oxford Economics/Haver Analytics
Financial services
ICT services
Professional, scientific and technical services
-40
-30
-20
-10
0
10
20
30
40
50
Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14
Source: LMC Automotive / Oxford Economics
France
Germany
Italy
UK
Motor vehicles: Car registrations3 month moving average, % year
European car sales revival adding to UK demand
Huge backlog of orders for airliners (& engines)
0
250
500
750
1000
1250
1500
1750
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Airbus
Boeing
Source: Company reports / Oxford Economics
Airbus and Boeing: OrdersNumber of aircraft
But pharmaceutical sector struggling
0
200
400
600
800
1000
1200
1400
1600
1800
2007 2008 2009 2010 2011 2012 2013 2014
Turnover: Pharmaceutical products£mn, 3 month moving average
Source : Haver Analytics
Export sales
Total
Domestic sales
Competitiveness issues facing other chemicals
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2007 2008 2009 2010 2011 2012 2013 2014
Turnover: Chemicals ex. pharma£mn, 3 month moving average
Source : Haver Analytics
Export sales
Total
Domestic sales
Digital, professional & support services
-20
-15
-10
-5
0
5
10
15
20
25
1981 1985 1989 1993 1997 2001 2005 2009 2013
Information & communication
Professional, scientific & technical activities
Administrative & support activities
UK: GDP, % change y/y
Source : Oxford Economics
Europe48%
Americas28%
Asia16%
Oceania4%
Africa4%
UK: Services exports, % of total
Source : Oxford Economics/Haver Analytics
Services exports currently skewed towards USA
Europe57%
Americas18%
Asia19%
Oceania2%
Africa4%
UK: Goods exports, % of total
Source : Oxford Economics/Haver Analytics
China’s imports of services set to grow hugely
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
2013 2018 2023 2028 2033 2038
China
Germany
USA
China, Germany & US imports services, $m
Source : Oxford Economics
Competition in the R&D space very intense
0 1 2 3 4 5
China 1996
UK
China 2012
US
Germany
Taiwan
Japan
Korea
World: R&D expenditures, % of GDP
Source : Oxford Economics/Haver Analytics
In the UK 2 regions (+ North West?) stand out
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2000 2004 2008 2012
R&D spending by region 2000-2012, £bn
Source : ONS
East of England
South East
North West
7 Conclusions
Nothing is certain
But the broad pattern is likely to be…
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1997-2007
2013 2014 2015 2016 2017 2018
Consumer spending Investment
Govt. consumption Inventories
Net trade
UK: Contributions to GDP growth, %pts
Source : Oxford Economics
Clearly, more exports would be nice to have
And a lot more R&D (and innovation generally)
UK forecast summary
2013 2014 2015 2016 2017 2018Domestic Demand 1.9 3.0 2.3 2.2 2.3 2.3
Private Consumption 1.6 2.1 2.3 2.2 2.5 2.6
Fixed Investment 3.2 8.5 6.2 5.9 5.5 4.3
Stockbuilding (% of GDP) 0.5 0.7 0.4 0.4 0.4 0.4
Government Consumption 0.7 1.0 0.2 -0.9 -1.5 -0.6
Exports of Goods and Services 0.5 -1.6 3.1 5.6 6.0 5.3
Imports of Goods and Services 0.5 -1.4 2.0 4.6 5.0 4.5
GDP 1.7 3.0 2.6 2.5 2.6 2.5
Industrial Production -0.2 2.3 1.2 1.5 1.5 1.3
CPI 2.6 1.5 1.1 1.8 2.0 2.0
Current Balance (% of GDP) -4.2 -4.7 -3.6 -2.8 -2.3 -1.8
Government Budget (% of GDP) -5.5 -5.8 -4.5 -3.3 -2.1 -1.0
Short-Term Interest Rates (%) 0.5 0.5 0.7 1.4 2.1 2.8
Long-Term Interest Rates (%) 2.5 2.7 2.7 3.1 3.5 4.0
Exchange Rate (US$ per £) 1.56 1.65 1.59 1.59 1.58 1.58
Exchange Rate (Euro per £) 1.18 1.24 1.29 1.31 1.32 1.33
Forecast for UK(Annual percentage changes unless specified)