Download neweconomymanchester.com

The macroeconomic environment
Alan Wilson
Oxford Economics
November 2009
The twin perils of economic forecasting
(as summarised by Sir Paul McCartney, 1965)
1) “Yesterday, all my troubles seemed so far away…”
2) “Now it looks as though they’re here to stay”
2
Key issues
 The global background
 Is the UK on the road to recovery?
 Will there be another boom in private services?
3
The Global Background
- who has suffered the most?
Recession expected to hit hardest those most
exposed to financial services…
Dependence on financial services
% of GVA
12
10
8
6
4
2
0
UK
US
Neth
Source : Oxford Economics
5
Italy Spain Japan France Swe
Ger
..where house prices were most excessive..
6
…and with the highest consumer debt
7
But credit conditions worsened in sync…
World: Credit growth
% year
16
14
UK M4 lending
ex OFCs
US loans & leases
12
10
8
6
4
2
Eurozone loans to
PNFCs and households
0
-2
-4
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source : Oxford Economics/Haver Analytics
8
… and synchronised global slump in confidence
Consumer confidence: US, UK and Eurozone
1985=100
160
% Balance
20
US
(LHS)
UK
(RHS)
140
120
10
0
100
-10
80
Eurozone
(RHS)
60
-20
-30
40
-40
20
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Haver Analytics
9
-50
What explains who suffered most?
 The financial shock was surprisingly similar across
countries, as was its impact on confidence
 So financial crisis became a full-blown corporate crisis, with
the countries most exposed now those most dependent on:
■ Manufacturing and trade
–especially in capital goods and cars
■ Capital flows
■ Oil and commodity exports
 Hence, Germany and Italy, as well as Eastern Europe,
actually suffered worse recession than the US and UK
10
Who has actually suffered most?
% change in GDP
Russia
Ireland
Japan
Hungary
Italy
Germany
Czech Rep
UK
Slovakia
Netherland
Austria
Spain
US
Portugal
Belgium
Canada
France
Korea
Brazil
Greece
Poland
India
China
-12
-10
-8
Source: Haver Analytics
11
-6
-4
-2
0
2
4
6
% change 2008Q2-2009Q2
8
First signs of recovery…
World: Purchasing Managers' Indices
Index
65
US
Manufacturing ISM
Eurozone
Manufacturing PMI
60
55
50
45
40
35
UK
Manufacturing PMI
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Haver Analytics
12
…and strong recovery in equity prices
Equity prices
1 Jan 2008=100
110
100
90
80
70
60
50
US
UK
Germany
France
40
Jan-08 Apr-08
Jul-08
Oct-08 Jan-09 Apr-09
Source : Oxford Economics/Haver Analytics
13
Jul-09
Oct-09
Monetary policy on full throttle…
14
…as is fiscal policy
World: fiscal stimulus packages
% of GDP
16
14
Headline package
12
Estimated new money
10
8
6
4
2
0
UK
EZ
US
Source : Oxford Economics/Haver Analytics
15
Japan
China
How strong will recovery be?
 Likely to be robust initially because of swing in inventory
cycle and rebound in world trade
 And policy remains very expansionary
 But likely to be bumpy and slower than ‘normal’:
■ Recoveries from banking crises usually slower
■ Household financial correction has some way to go
■ Business investment likely to be slow to recover given large
overhang of spare capacity in many sectors, slowing recovery in
countries dependent on capital goods
■ Car sector will be adversely affected when scrappage schemes end
■ Rising oil prices good for Russia but bad for most
16
Oxford Economics’ forecast
World GDP Growth
% Change on Previous Year
2008 2009 2010 2011 2012 2013
US
0.4
-2.5
2.5
3.0
3.2
3.4
Eurozone
0.6
-4.0
0.6
1.5
2.3
2.4
Germany
1.0
-5.0
1.1
1.5
2.2
2.5
France
0.3
-2.2
0.9
1.5
2.2
2.3
-1.0
-5.0
0.4
1.5
1.6
1.6
0.6
-4.4
0.7
2.2
3.1
3.4
-0.7
-5.6
1.2
1.6
2.1
2.5
South Korea
China
India
Other Asia
2.2
8.9
7.5
3.8
-0.8
8.8
5.9
-1.7
3.7
9.3
6.8
2.5
4.6
9.0
8.8
3.7
4.9
9.0
9.0
4.2
4.6
8.9
8.8
4.1
Mexico
Other Latin America
1.4
4.9
-6.7
-0.8
4.6
2.8
5.1
4.6
5.4
5.0
4.8
4.3
Eastern Europe
5.5
-6.1
1.8
4.1
5.3
5.2
World
World (PPP)
1.6
2.9
-2.2
-1.2
2.6
3.3
3.5
4.2
4.0
4.8
4.1
4.8
of which:
Italy
UK
Japan
17
The UK Forecast
- on the road to recovery?
UK still in recession…
World: GDP
%/quarter
1.5
UK
US
Eurozone
1.0
(f)
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
Q1
Q2
Q3
2008
Source : Haver Analytics
19
Q4
Q1
Q2
2009
Q3
…but was September really that bad?
UK: Monthly output estimates
%/month
2
Manufacturing
Services
1
0
-1
-2
-3
-4
Jan
Feb
Mar
Apr
May
Source : Oxford Economics/Haver Analytics
20
Jun
Jul
Aug
Sep
Services weakness doesn’t tally with….
UK: Services output
Jan 2009=100
101
Finance &
business services
Government &
other services
100
99
98
97
96
95
Jan
Distribution, hotels
& catering
Feb
Mar
Transport &
communications
Apr
May
Source : Oxford Economics/Haver Analytics
21
Jun
Jul
Aug
Sep
…strong rebound in survey data…
UK: Purchasing managers survey
% balance*
65
60
*value over 50 indicates
rising activity
Services business
activity
55
50
45
40
Manufacturing
activity
35
30
1997
1999
2001
Source: Haver Analytics/Markit
22
2003
2005
2007
2009
… and firm retail sales figures…
UK: Retail sales volumes
%3m/year
9
% balance
80
8
60
CBI DTS (RHS)
7
40
6
5
20
4
0
3
2
-20
ONS (LHS)
1
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source : Oxford Economics/Haver Analytics
23
-40
-60
…while house prices have surged recently
UK: Nationwide house price index
% year
40
% 3-month annualised
30
20
% year
10
0
-10
-20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Haver Analytics
24
£200bn of QE authorised to date…
UK: APF asset purchases
£bn
200
180
160
140
120
100
80
60
40
20
0
Mar Apr
Ma
Jun
Source : Bank of England
25
Jul
Aug Sep Oct
Nov De
Jan
…but credit scarce for businesses
UK: MFI lending to UK PNFCs
%/year
25
20
15
10
5
0
-5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source
: Bank
of England
Source
: Bank
of England
26
Household correction has some way to go
Fall in household wealth (% of GDP)
% of GDP
0
-10
-20
-30
-40
-50
-60
-70
-80
-90
-100
US
UK
Source : Oxford Economics
27
Spain
France
Italy
Germany
…and unemployment will rise into 2010
UK: Unemployment
%
11
Forecast
10
9
8
7
ILO
6
5
4
Claimant count
3
2
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Oxford Economics
28
Fiscal deficit will continue to climb
UK: Maastricht indicators
% of GDP
% of GDP
14
100
12
10
8
90
Government
balance
(LHS)
6
80
Government
debt
(RHS)
70
60
4
50
2
40
0
F'cast
-2
30
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Source: Oxford Economics
29
UK forecast
Forecast for UK
(Annual percentage changes unless specified)
Domestic Demand
Private Consumption
Fixed Investment
Stockbuilding (% of GDP)
Government Consumption
Exports of Goods and Services
Imports of Goods and Services
GDP
Industrial Production
CPI
Current Balance (% of GDP)
Government Budget (% of GDP)
Short-Term Interest Rates (%)
Long-Term Interest Rates (%)
Exchange Rate (US$ per £)
Exchange Rate (Euro per £)
30
2008
2009
2010
2011
2012
2013
0.1
0.9
-3.3
0.1
2.5
1.0
-0.8
0.6
-3.1
3.6
-1.6
-5.2
5.49
4.59
1.85
1.26
-5.2
-3.1
-15.2
-1.0
2.1
-10.4
-12.6
-4.4
-9.9
2.0
-2.3
-11.7
1.20
3.64
1.56
1.12
0.2
-0.5
-3.1
-0.2
0.7
2.7
0.8
0.7
0.5
1.3
-1.9
-13.1
0.60
4.08
1.69
1.16
1.4
1.5
1.4
0.3
-1.0
6.3
3.4
2.2
2.4
1.1
-1.1
-11.6
1.24
4.90
1.75
1.25
2.4
2.8
4.4
0.2
0.5
7.9
5.4
3.1
2.9
1.4
-0.5
-9.2
2.24
5.17
1.77
1.33
3.0
3.6
4.9
0.1
0.8
6.2
5.0
3.4
2.3
1.7
-0.2
-7.4
3.24
5.20
1.73
1.35
Sectors and Regions
- can private services be the engine of growth
again?
16 years of continuous growth
Private Services GVA
£m, 2005
prices
700
per cent
65
Share of Whole
Economy
63
61
600
59
57
500
55
Volume
(4.0% p.a., 1992-2008)
400
53
51
49
300
47
200
1981
45
1985
1989
1993
1997
Source : Oxford Economics/Haver Analytics
32
2001
2005
2009
A Major driver of UK employment growth
Private Services Employment
000's
18000
per cent
Share of Whole
Economy
17000
56
54
16000
52
15000
50
Jobs
14000
(1.8% p.a., 1992-2008)
13000
46
12000
44
11000
42
10000
1981
40
1985
1989
1993
Source : Oxford Economics/Haver Analytics
33
48
1997
2001
2005
2009
Two boom periods – late 1980s + 1993-01
Employment Growth
per cent p.a.
5
Private Services
4
3
2
1
0
-1
-2
-3
-4
1982
Whole Economy
1986
1990
1994
Source : Oxford Economics/Haver Analytics
34
1998
2002
2006
Consumer Spending is the main driver
Private Services GVA and Consumer Spending
per cent p.a.
10
8
Consumer
Spending
Private
Services
6
4
2
0
-2
-4
-6
1982
1986
1990
1994
Source : Oxford Economics/Haver Analytics
35
1998
2002
2006
But services exports have outstripped manufactures…
Export Growth 2004-7
Finance & Business
Services
Distribution & Hotels
PAD, Education &
Health
Manufacturing
Transport &
Communications
Other Services
0
5
10
15
20
25
per cent, current prices
36
30
35
40
…even in absolute terms
Change in Exports 2004-7
35000
30000
£million
25000
20000
15000
10000
5000
0
Manufactures
37
Private Services
The forecast
 Private sector services will recover as the economy
recovers but..
 Growth will be more like 2001-8 than 1992-01
 Productivity growth may be weaker in some industries
 Jobs growth in most sectors but biggest increases in
business services
 Return to export growth will help drive financial and
business services growth even though:
 Domestic financial service may lag behind and
international financial and business services may have
more scope for growth (despite the credit crunch!)
38
Which areas will struggle to provide jobs and
economic activity?
 Domestic financial services (retail banks, call centres,
mortgage brokers etc)
 Retail?
 Public sector
 Construction – eventual end of public infrastructure boom;
still capital around for private sector but problems with
excess capacity and risk aversion; residential could be an
exception
 Issue: what can lead re-generation if retail, public sector
and financial services demand is lacking?
39
Where will growth come from?
 Internationally traded services (financial, computer
services, business services, retail?)
 Continued growth of contracted out business services
 Leisure – if exchange rate stays competitive
40
World demand very important
Exports of Services
£m, 2005 pr
40000
35000
Long-run elasticities:
30000
World Investment:
Relative ULC:
25000
1.97
-0.34
20000
15000
10000
Source : Oxford Economics/Haver Analytics
41
08
20
06
20
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
19
80
5000
Risks to the economic outlook
Short-term outlook
 ‘W’-shaped cycle
42
25%  ‘V’-shaped recovery
■ Growth initially boosted by inventory
rebuild
■ But final demand remains weak as
banks and households keep
deleveraging
■ Oil/commodity price spike
■ Growth sluggish again in 2010H2
and 2011 after initial bounceback
 Deflation (‘L’-shape)
7.5%
■ Renewed asset price weakness
holds back banking recovery
■ Unemployment rises sharply further
depressing consumption
■ Monetary/fiscal policy not effective
as deflation grips
■ Economy flatlines in 2010 and
beyond
20%
■ Return to growth boosts business
and consumer confidence
■ Fiscal and monetary stimuli feed
through quickly
■ Financial market rally becomes
firmly established
■ Strong global rebound and weak
pound boost exports
 Oxford forecast (‘U’-shape) 45%
■ Monetary easing blunted by weak
banks but eventually works
■ Gradual rise in business and
consumer confidence
■ Bumpy growth profile due to VAT
effect
■ Weak recovery in 2010, gaining
traction in 2011
Medium-term outlook
Conclusions
 The UK recovery has lagged its competitors
 Some bounce in the economy still likely to be happening in 2009H2
(first estimate of Q3GDP likely to be revised up)
 But much of the bounce is due to short-term factors and, with private
demand remaining very weak, growth is likely to dip in 2010H1
 Cautious recovery, with most people reluctant to over-spend…
 …including Her Majesty’s Government
 Leaving us dependent upon investment & exports and hence world
recovery
 Nevertheless, wrong to assume a weak economy is here to stay, and
private services are likely to lead the way in providing new jobs as
recovery becomes established
43