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EY ITEM Club
Spring 2016 forecast:
How long can the consumer drive the recovery?
Peter Arnold
April 2016
The last gasps of a consumer led recover, while we (still)
wait for rebalancing to investment and export-led growth
►
The forecast shows growth of 2.3% in GDP this year, driven largely by the
consumer, the main beneficiary of the collapse in commodity prices
►
However, the headwinds facing the consumer resume next year as inflation
returns and taxes and other levies begin to bite
►
Business investment stalled in the second half of last year and industrial
surveys have weakened further this year
►
Exports also stalled in the second half of 2015, while import growth picked
up - the current account deficit of 7% of GDP the largest on record
►
Investment should recover post-referendum
Saving is at an all-time low, but the debt to income ratio is still
remarkably stable…
UK: Personal sector saving
UK: Household debt-to-income ratio
% of disposable income
14
% of disposable income
180
Savings ratio
Net acquisition of financial assets
12
170
10
160
8
6
150
140
4
2
0
130
120
-2
110
-4
100
-6
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
90
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source : Haver Analytics
Source : Haver Analytics
Instead of releasing equity, people are financing housing
investment by selling financial assets…
UK: Financial investments and housing equity
withdrawal
UK: Housing equity withdrawal
£bn
40
35
£bn
50
30
40
25
30
HEW
20
15
10
Housing
investment
20
Cash
injections
5
0
Mortgage borrowing
-5
-10
1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Source : Haver Analytics
Financial
investment
Household
Saving
10
0
-10
-20
Equity
withdrawal
-30
1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Source : Haver Analytics
Households have also relied on labour rather than credit
markets to support spending…
►
During the recession, as workers took cuts in real wages to preserve their
jobs
►
As the economy recovered between the end of 2009 and 2015, employment
increased from 70.6% of the population of working age to 74.1%
►
Average hours, which usually trend down over time, increased from 31.5 to
32.2 a week
►
In contrast, the employment rate remained flat at around 72.8% between the
end of 2001 and end 2007, while average hours fell from 32.5 to 31.9 a
week
But these trends are now likely to slow . . . .
Consumption slows and the fall in unemployment comes to an
end…
UK: Real household income and spending
UK: Unemployment
% year
6
%
9
Household
income
Forecast
Forecast
8
4
7
6
2
ILO
5
0
4
3
-2
2
-4
-6
2004
Household
spending
2006
2008
Source : EY ITEM Club
Claimant count
1
2010
2012
2014
2016
2018
2020
0
2004
2006
2008
Source : EY ITEM Club
2010
2012
2014
2016
2018
2020
External trade continues to disappoint …
UK: Exports & world trade
UK: Contributions to GDP growth
% year
15
% year
4
World trade
Exports (non-fuel goods)
Forecast
Domestic demand
Net exports
GDP growth
Forecast
3
10
2
1
5
0
0
-1
-5
-2
-3
-10
-4
-15
-5
2004
2006
2008
Source : EY ITEM Club
2010
2012
2014
2016
2018
2020
2004
2006
2008
Source : EY ITEM Club
2010
2012
2014
2016
2018
2020
Business confidence has weakened but investment should bounce back
following a vote to remain in the EU…
UK: Business investment & GDP
% year
20
Forecast
Business
investment
15
10
5
0
-5
GDP
-10
-15
-20
2004
2006
2008
Source : EY ITEM Club
2010
2012
2014
2016
2018
2020
The referendum on EU membership…
►
However, it will be a different story if there is a vote to leave on June 23
►
Short term, the fundamentals would remain in place during the 2 year
transition period but uncertainty about the eventual settlement could hit
business confidence and investment
►
Scenarios for exit have been modelled by OE covering:
- Trade with REU and RoW
- Migration
- Regulation
- Fiscal and monetary policy
The government response would be critical…
A populist response
►
A Liberal response
►
Aggressive clampdown on
migration
►
Modest migration controls, with
targeting
►
No regulatory relaxation
►
Maximize regulatory opportunity
►
Maintain external tariff with RoW
►
Abolish external tariffs
►
Spend any fiscal savings
►
Cut tax with any fiscal savings
According to the OE report it is hard to see any net positive
economic benefit under any Brexit scenario:
Key:
Policy direction:
LIB – liberal
MOD – moderate
POP – populist
Trade agreement:
CUS – customs union
BIL – bilateral
accords
FTA – free trade
agreement
MFN – most favoured
nation
The EY ITEM Club forecast for the UK Economy, Spring 2016
% changes on previous year except borrowing, current account and interest & exchange rates