Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
The Green Budget The Economic Outlook January 2005 Professor David Miles +44 20 7425 1820 [email protected] Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. The Economic Outlook The UK economy has been unusually stable in recent years. But there is no strong evidence that there has been an increase in the sustainable long-term growth rate of the economy. The Treasury believes that the sustainable ‘trend’ growth rate of the economy is 2.75% a year, falling to 2.5% in 2007. This looks plausible. But our analysis suggests that there is little or no spare capacity in the economy – this is important for estimating when the cycle ends and for near term growth prospects . We think growth will be somewhat weaker than the Treasury forecast in the short term, but its longer-term projections look plausible. But there is the risk of a more dramatic slowdown if the household sector decides to sharply increase its saving rate from the current low level. Please refer to important disclosures at the end of this presentation Economic growth less variable than in the past 11 UK GDP (volume, Y%) 9 7 5 % 3 1 -11957 1966 1975 1984 1993 2002 -3 -5 Source: ONS Please refer to important disclosures at the end of this presentation Inflation has been low and stable since the mid 1990’s 30 CPI - inflation RPI - inflation 25 20 % 15 10 5 0 1957 1966 1975 1984 1993 2002 Source: ONS Please refer to important disclosures at the end of this presentation Annual growth and inflation by decade 19571964 19651974 19751984 19851994 19952004 Growth in real GDP 3.3 2.7 1.5 2.6 2.8 Growth in real GDP per capita b 2.6 2.3 1.5 2.3 2.4 Variability of real GDP growth (standard deviation of annual change)a 2.6 2.3 2.4 2.2 0.7 Variability of retail price inflation (standard deviation of annual change)a 1.6 3.8 6.3 2.5 0.8 a Standard deviation of the year-on-year percentage change using quarterly data. b Real GDP per resident population; 2004 is a Morgan Stanley estimate. Other indicators are year-to-date. Sources: ONS, Morgan Stanley research Please refer to important disclosures at the end of this presentation UK per capita output catches up with its European peers % of US 1980 1990 2000 2003 66 67 72 74 77 75 73 72 80 78 72 70 74 74 71 71 100 100 100 100 UK France Germany a Italy US a West Germany through 1990. Source: OECD, Constant 1995 prices and PPP, Morgan Stanley Research Estimates Please refer to important disclosures at the end of this presentation Cycles, Capacity and Trend Rate of Growth Where we are in the business cycle and what future cycles and trend growth look like is crucial in assessing the fiscal outlook. We look at a range of evidence on the issues. Simple statistical techniques suggest no spare capacity. Looking at the capital stock and conditions in the labour market gives a similar picture. The evidence for a sustainable improvement in the rate of growth of the economy over the medium term looks thin. Please refer to important disclosures at the end of this presentation Hodrick-Prescott measures of spare capacity 9% 1600 HP 100 HMT 7% 5% 3% 1% -1% -3% -5% -7% -9% 1980Q2 1984Q2 1988Q2 1992Q2 1996Q2 2000Q2 2004Q2 Source: ONS and Morgan Stanley Research Please refer to important disclosures at the end of this presentation Hodrick-Prescott and Christiano-Fitzgerald (CF) measures of spare capacity 9% 1600 CF HMT 7% 5% 3% 1% -1% -3% -5% -7% -9% 1980Q2 1984Q2 1988Q2 1992Q2 1996Q2 2000Q2 2004Q2 Source: ONS and Morgan Stanley Research Please refer to important disclosures at the end of this presentation Alternative estimates of spare capacity Method HP filter (λ= 1600) HP filter (λ= 3600) HP filter (λ= 100) CF filter Linear trend HM Treasurya Q1 2004 (% GDP) 0.0 -0.2 0.2 0.8 1.2 -1.0 Q2 2004 (% GDP) Q3 2004 (% GDP) 0.3 0.1 0.4 1.0 1.5 -1.0 0.1 -0.1 0.1 1.0 1.3 -1.0 Source: HM Treasury, Statistics Office. Morgan Stanley Research. Note: The linear trend is estimated via Ordinary Least Squares (OLS). Note: negative numbers imply spare capacity; positive numbers imply output is above trend a % of potential output Please refer to important disclosures at the end of this presentation Employment and unemployment headcounts (million) 3.5 29 Unemployment (LHS) Employment (RHS) 28 3.0 27 2.5 26 2.0 25 1.5 1.0 1984 24 23 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Source: ONS, DataStream Notes: UK LFS employment, unemployment levels in million, headcount. Please refer to important disclosures at the end of this presentation Employment and participation rates (%) 82.0 81.5 81.0 80.5 % Participation (LHS) Employment (RHS) 76 75 74 80.0 73 79.5 72 79.0 71 78.5 78.0 77.5 % 70 69 77.0 68 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Note: Percentage of working age population. Sources: HM Treasury and ONS. Source: Labour Force Survey, ONS, DataStream. Participation rate: percentage of working-age population who are economically active. Please refer to important disclosures at the end of this presentation Ratio of output to the stock of capital 0.60 Fitted trend Actual 0.56 0.52 0.48 0.44 0.40 1987 1989 1991 1993 1995 1997 1999 2001 2003 Source: ONS. Morgan Stanley Research Note: net of residential housing Please refer to important disclosures at the end of this presentation Net national saving rate as % GDP 8 National net saving rate 7 6 5 % 4 3 2 1 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 Sources: ONS and DataStream Please refer to important disclosures at the end of this presentation Treasury and Morgan Stanley trend growth estimates MS Benchmark case HM Treasury (HP lambda=1600) CF Band pass Filter 1986H1 - 97H1 2.55 2.44 2.50 1997H2 - 01Q3 3.06 2.98 3.02 2001Q4 - 06Q4 2.75 2.55 1.90 - 2.10 2007Q1 - 09Q4 2.50 2.55 2.45 Source: ONS and Morgan Stanley Research Please refer to important disclosures at the end of this presentation Treasury forecasts for key economic variables Year-on-year growth (%) 2003 (outturn) 2004 2005 2006 2007 Real GDP 2.25 3.25 3.00-3.50 2.50-3.00 2.25-2.75 Domestic demand 2.5 4.00 3.00-3.50 2.50-3.00 2.25-2.75 2.25 3.25 2.25-2.75 2.00-2.50 2.00-2.50 General government consumption 3.50 4.50 3.00 3.00 2.50 Fixed investment 2.25 6.50 6.75-7.25 3.25-3.75 2.75-3.25 Exports 0.0 2.25 6.50-7.00 6.25-6.75 6.25-6.75 Imports 1.25 4.75 6.00-6.25 5.25-5.75 5.25-5.75 CPI (Q4) 1.50 1.25 1.75 2.00 2.00 Nominal GDP 5.25 5.50 5.75-6.00 5.25-5.75 5.00-5.50 Household consumption Sources: HM Treasury 2004 Pre-Budget Report (December 2004) Please refer to important disclosures at the end of this presentation The Economic Outlook The near term forecast of HMT depends upon fairly strong growth in exports and no very significant slowdown in consumer spending growth. There are obvious risks to that forecast – and in terms of overall demand the risks are probably more on the down side. Conditions in the housing market and a starting point with very low household saving suggest slower consumer growth is likely. Morgan Stanley expects slower growth in the global economy and with sterling probably overvalued a sharp rise in exports this year looks unlikely. Please refer to important disclosures at the end of this presentation Income to house price ratios relatively high 5.0 ODPM - House Price to Income Ratio (based on lenders data) 4.5 4.0 3.5 3.0 2.5 2.0 1969 1973 1977 1981 1985 1989 1993 1997 2001 Source: Office of the Deputy Prime Minister Please refer to important disclosures at the end of this presentation Mortgage payments still relatively affordable 16 Debt servicing as % post-tax income 15 14 13 12 % 11 10 9 8 7 1988 1990 1992 1994 1996 1998 2000 2002 2004 Source: Bank of England, ONS and Morgan Stanley Research Note: interest payments plus mortgage principal payments as % post tax household income. Please refer to important disclosures at the end of this presentation House prices and the saving ratio 14 40 Household savings ratio (LHS) Halifax house prices (RHS, %Y) 35 12 30 25 10 20 % 8 15 6 10 % 5 4 0 -5 2 -10 0 1984 -15 1988 1992 1996 2000 2004 Source: Bank of England, ONS and Morgan Stanley Research Please refer to important disclosures at the end of this presentation UK trade balance and the real effective exchange rate IMF real exchange rate (LHS) Current a/c deficit % GDP (RHS) Trade balance % GDP (RHS) 140 120 6 4 100 2 80 0 60 -2 40 -4 20 -6 0 Q1 1980 Q1 1984 Q1 1988 Q1 1992 Q1 1996 Q1 2000 % -8 Q1 2004 Sources: ONS, IMF Please refer to important disclosures at the end of this presentation Slowing world trade growth 16% World export growth (%Y, goods & services) 14% Morgan Stanley forecasts 12% 10% 8% 6% 4% 2% 0% 2000 2001 2002 2003 2004 2005 2006 Source: IMF, Morgan Stanley Research Estimates Please refer to important disclosures at the end of this presentation Morgan Stanley forecasts – central case Year-on-year (%) 2003-4 2004-5 2005-6 2006-7 2007-8 2008-9 2009-10 Real GDP 2.75 2.9 2.1 2.8 2.5 2.5 2.5 Real Household Expenditure 2.6 2.6 1.9 2.5 2.4 2.3 2.3 Consumer prices 1.3 1.3 1.5 2.0 2.0 2.0 2.0 GDP deflator 2.8 2.0 2.3 2.7 2.8 2.8 2.8 Money GDP (£ billion) 1116 1170 1222 1290 1358 1430 1506 Sources: Morgan Stanley Research estimates Please refer to important disclosures at the end of this presentation Saving rates under central and ‘worst’ case 20 18 Morgan Stanley forecasts 16 14 Whole economy gross saving rate National net saving rate 12 % 10 H/H saving ratio ` 8 6 H/H saving ratio – Morgan Stanley central case 4 2 0 1987 1991 1995 1999 2003 2007 H/H saving ratio – Morgan Stanley 'worst case' Source: ONS, Morgan Stanley Research Estimates Please refer to important disclosures at the end of this presentation Morgan Stanley forecasts – worst case Year-on-year (%) 2003-4 2004-5 2005-6 2006-7 2007-8 2008-9 2009-10 Real GDP 2.75 2.76 0.66 1.44 2.00 2.25 2.25 Real Household Expenditure 2.60 2.44 -0.14 0.63 1.0 1.0 1.0 Consumer prices 1.25 1.3 1.2 1.5 1.8 2.0 2.0 GDP deflator 2.75 2.00 2.10 2.30 2.50 2.80 2.80 Money GDP (£ billion) 1116 1169 1201 1246 1302 1368 1437 Sources: Morgan Stanley Research Please refer to important disclosures at the end of this presentation Disclaimers Important US Regulatory Disclosures on Subject Companies The information and opinions in this report were prepared by Morgan Stanley & Co. International Limited and its affiliates (collectively, "Morgan Stanley"). The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Stock Ratings Different securities firms use a variety of rating terms as well as different rating systems to describe their recommendations. For example, Morgan Stanley uses a relative rating system including terms such as Overweight, Equal-weight or Underweight (see definitions below). A rating system using terms such as buy, hold and sell is not equivalent to our rating system. Investors should carefully read the definitions of all ratings used in each research report. In addition, since the research report contains more complete information concerning the analyst’s views, investors should carefully read the entire research report and not infer its contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor’s decision to buy or sell a stock should depend on individual circumstances (such as the investor’s existing holdings) and other considerations. Global Stock Ratings Distribution (as of December 31, 2004) Coverage Universe Stock Rating Category Count Overweight/Buy Equal-weight/Hold Underweight/Sell Total 632 880 374 1,886 Investment Banking Clients (IBC) % of Total 34% 47% 20% Count 249 310 99 658 % of Total IBC % of Rating Category 38% 47% 15% 39% 35% 26% Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months. Please refer to important disclosures at the end of this presentation Disclaimers ANALYST STOCK RATINGS Overweight (O). The stock’s total return is expected to exceed the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock’s total return is expected to be in line with the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock’s total return is expected to be below the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months. More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst’s view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner. Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts. ANALYST INDUSTRY VIEWS Attractive (A). The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark named on the cover of this report. In-Line (I). The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark named on the cover of this report. Cautious (C). The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark named on the cover of this report. Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA. Please refer to important disclosures at the end of this presentation Disclaimers Other Important Disclosures This research report has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www.morganstanley.com and other electronic systems. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdings disclosed in the section entitled "Important US Regulatory Disclosures on Subject Companies", Morgan Stanley and/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons. Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley sells to and buys from customers the equity securities of companies covered in its research reports on a principal basis. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company. Please refer to important disclosures at the end of this presentation Disclaimers With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. This publication is disseminated in Japan by Morgan Stanley Japan Limited; in Hong Kong by Morgan Stanley Dean Witter Asia Limited; in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia by Morgan Stanley Dean Witter Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services licence No. 233742, which accepts responsibility for its contents; in Taiwan by Morgan Stanley & Co. International Limited, Taipei Branch; in Korea by Morgan Stanley & Co. International Limited, Seoul Branch; in India by JM Morgan Stanley Securities Private Limited; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., which accept responsibility for its contents. Morgan Stanley & Co. International Limited, authorized and regulated by Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International Limited representative about the investments concerned. In Australia, this report, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act. The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities is available on request. Please refer to important disclosures at the end of this presentation