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It’s after the election when things get really
interesting……
Douglas McWilliams
centre for economics and business research ltd
10 May 2010
© centre for economics and business research ltd
Objectives
• To present and discuss cebr’s forecasts for the economy post
election
the prospects service
Outline
• The world economic background
• UK prospects
• The UK fiscal challenge
• A hung parliament
• Conclusions
the prospects service
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
the prospects service
Western world has fallen below 50 per cent
of world GDP
Western world share of world GDP
70%
65%
60%
55%
50%
45%
40%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
the prospects service
Comparison of GDP in dollars
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
US
Jap Chi Ger Ita
Fra UK Esp Rus Bra Can Aus Ind
9951
10286
10642
11142
11868
12638
13399
14078
14441
14266
14704
15327
16009
16729
17419
18290
4667
4095
3918
4229
4606
4552
4363
4380
4911
5049
5187
5267
5411
5591
5792
5965
1333
1341
1463
1804
2061
2148
2270
2598
2867
2878
2923
2990
3071
3164
3263
3376
1198
1325
1454
1641
1932
2236
2658
3382
4327
4758
5263
5844
6524
7288
8283
8946
1906
1893
2024
2447
2749
2793
2920
3328
3673
3534
3541
3556
3589
3633
3682
3828
1101
1118
1223
1510
1730
1781
1865
2118
2314
2282
2313
2335
2373
2423
2488
2562
1481
1471
1615
1863
2204
2283
2443
2800
2680
2198
2189
2194
2212
2233
2253
2272
582
610
689
885
1046
1132
1236
1443
1602
1571
1571
1575
1591
1618
1656
1705
260
307
345
431
592
764
989
1294
1677
1439
1703
1975
2274
2616
3040
3382
644
554
506
552
664
882
1089
1334
1550
1728
1923
2124
2345
2595
2872
3194
725
715
735
866
992
1134
1278
1427
1499
1448
1558
1703
1857
2014
2174
2408
390
368
413
528
641
713
755
910
1013
920
983
1082
1206
1346
1481
1664
1220
1251
1404
1576
1769
1986
2229
2502
the prospects service
World economy rankings
US Jap Chi Ger Ita Fra UK
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
2
2
2
2
2
2
2
2
2
2
3
3
3
3
3
3
6
6
6
6
6
5
4
3
3
3
2
2
2
2
2
2
3
3
3
3
3
3
3
4
4
4
4
4
4
4
4
4
7
7
7
7
7
7
7
7
7
6
6
6
6
8
8
8
5
5
5
5
5
6
6
6
5
5
5
5
5
5
5
6
4
4
4
4
4
4
5
5
6
7
7
7
9
9
9
11
Esp Rus Bra
10
9
9
8
8
9
9
8
9
9
10
12
12
12
12
12
12
12
12
12
12
11
11
11
8
11
9
9
8
6
6
5
9
10
10
10
10
10
10
10
10
8
8
8
7
7
7
7
Can Aus Ind
8
8
8
9
9
8
8
9
11
10
11
10
10
10
11
10
11
11
11
11
11
12
12
12
13
13
13
13
13
13
13
13
12
12
12
11
11
11
10
9
the prospects service
WORLD ECONOMIC OUTLOOK
The world economy is bouncing back but will not
return to mid 2000s growth
World real GDP growth, annual percentage change
5%
4%
3%
2%
1%
0%
-1%
-2%
1998
2000 2002
2004
2006 2008
2010 2012 2014
the prospects service
Gross domestic product
We are much more pessimistic than Mr Darling about likely
UK growth post 2010
Real gross domestic product, annual percentage change
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
2000
2002
2004
2006
cebr
2008
2010
Treasury
2012
2014
the prospects service
Average earnings
Earnings growth to hit historic low in 2009
and remain steady
Average earnings (incl. bonuses), annual percentage change
9
8
7
6
5
4
3
2
1
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
0
the prospects service
Consumer spending and saving
Saving highest in 11 years as households pay
off debt mountain
Household savings ratio, per cent of total household resources
and growth in overall household debt, annual percentage change
16
14
12
10
8
6
4
2
0
-2
1994
1998
2002
Savings ratio
2006
2010
Household debt
2014
the prospects service
Consumer spending and saving
Consumer recession is over but cautious
outlook beyond Christmas bonanza
Consumer spending, annual percentage growth
6
5
4
3
2
1
0
-1
-2
-3
-4
1999
2001
2003
2005
2007
2009
2011
2013
the prospects service
Inflation
Inflation rise largely driven by VAT reversal but
oil and sterling are risks
Consumer price inflation, quarterly annual percentage change
6
5
4
3
2
1
0
-1
CPI
Feb-14
Feb-12
Feb-10
Feb-08
Feb-06
Feb-04
Feb-02
Feb-00
-2
RPI
the prospects service
Interest rates
Monetary policy looser for longer to
counteract fiscal contraction
Bank of England base interest rate, percentage
7%
6%
5%
4%
3%
2%
1%
Mar-14
Mar-12
Mar-10
Mar-08
Mar-06
Mar-04
Mar-02
Mar-00
0%
the prospects service
PUBLIC FINANCES OUTLOOK
If you plug in our growth forecasts then borrowing falls very
slowly
Government surplus on current Budget, £ billion, financial year
50
0
-50
-100
-150
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-200
cebr forecast
Treasury forecast
the prospects service
PUBLIC FINANCES OUTLOOK
If you plug in our growth forecasts then borrowing falls very
slowly
Government net surplus, £ billion, financial year
50
0
-50
-100
-150
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-200
cebr forecast
Treasury forecast
the prospects service
Public spending as a share of GDP in the UK has shot up
both in absolute terms and compared with other countries
Total public outlays as percentage of GDP – source OECD
55
50
45
40
35
United Kingdom
Eurozone
20
10
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
30
US
the prospects service
…and is now higher than in any of the Southern European
EU member states….
Total public outlays as percentage of GDP – source OECD
60
55
50
45
40
35
United Kingdom
Greece
Italy
Spain
20
10
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
30
Portugal
the prospects service
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
the prospects service
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?
the prospects service
Exchange rates
Likely to be an early forex impact from hung
parliament but effects likely to wear off
Sterling euro exchange rate
€ 1.6
€ 1.5
€ 1.4
€ 1.3
€ 1.2
€ 1.1
€ 1.0
Small tory majority
Hung parliament worst case
2013
2012
2011
2010
€ 0.9
Hung parliament best case
the prospects service
Interest rates
If a hung parliament frightens the markets, the
MPC may have to raise rates temporarily
Bank of England base rate
7.0
6.0
5.0
4.0
3.0
2.0
1.0
Small tory majority
Hung parliament worst case
2013
2012
2011
2010
0.0
Hung parliament best case
the prospects service
Interest rates
…and the bond market could be especially worried
initially
Yield on 10 yr UK government gilt
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
Small tory majority
Hung parliament worst case
2013
2012
2011
2010
0.0
Hung parliament best case
the prospects service
But growth would not be much affected unless there is
a severe crisis – sluggish growth on all scenarios
Yield on 10 yr UK government gilt
2.5%
2.0%
1.5%
1.0%
0.5%
Small tory majority
Hung parliament worst case
2013
2012
2011
2010
0.0%
Hung parliament best case
the prospects service
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
the prospects service
It’s after the election when things get really
interesting……
Douglas McWilliams
centre for economics and business research ltd
[email protected]
© centre for economics and business research ltd