Download November baseline forecast

The macroeconomic environment
Alan Wilson
Oxford Economics
November 2008
The macroeconomic environment – a summary
2
Key issues
 The global background
 How severe a recession in the UK?
 What structural changes are taking place?
 Implications for the regional pattern of growth
3
The Global Background
Rising waves of financial stress
US: Financial stress indicator
45
high stress
40
35
30
Lehmans' collapse, Paulson plan
25
20
Fannie Mae & Freddie Mac support
15
Bear Stearns' rescue
10
End-year liquidity squeeze
5
Credit crunch starts
0
-5
low stress
-10
2004
2005
Source: Oxford Economics
5
2006
2007
2008
At the same time, price rises were squeezing incomes
World: Commodity prices
$/barrel
170
2000 Week 1=100
280
260
150
130
110
240
Economist ($)
commodity price
index (RHS)
200
90
180
70
160
50
30
140
Brent oil
(LHS)
10
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Haver Analytics
6
220
120
100
80
2009 set to be a very tough year
World: GDP growth
% year
UK
5
US
Forecast
4
3
2
1
0
Eurozone
-1
-2
-3
1990
1993
1996
Source: Oxford Economics
7
1999
2002
2005
2008
2011
Forecast summary
World GDP Growth
% Change on Previous Year
2007 2008 2009 2010 2011 2012
US
2.0
1.3
-0.4
2.5
3.6
3.8
Japan
2.0
0.5
-1.1
0.6
1.5
2.0
Eurozone
2.6
1.0
-0.5
1.2
2.0
2.3
Germany
2.6
1.3
-0.7
1.1
1.8
2.3
France
2.1
0.9
-0.3
1.2
1.9
2.2
Italy
1.4
-0.4
-0.8
0.5
1.3
1.7
3.0
0.8
-1.0
0.9
2.6
3.3
5.0
11.9
6.0
4.1
9.2
3.4
1.5
8.4
1.6
4.2
8.7
4.4
5.6
8.9
5.3
5.4
9.2
5.2
Mexico
Other Latin America
3.2
6.2
2.0
5.3
0.4
2.5
2.1
3.4
4.6
4.2
4.9
3.9
Eastern Europe
7.3
6.3
3.6
4.4
5.3
5.5
World
World (PPP)
3.8
4.8
2.4
3.6
1.0
2.1
2.9
3.7
4.0
4.6
4.2
4.8
of which:
UK
South Korea
China
Other Asia
8
Will policy help? – co-ordinated rate cuts
Official interest rates
%
7
6
UK repo rate
5
4
3
2
ECB repo rate
1
US Federal funds target rate
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Haver Analytics
9
Fiscal policy to support demand
World: Public sector deficits
% of GDP
4
US
Forecast
2
0
-2
-4
-6
Eurozone
UK
-8
-10
1986
1990
1994
Source: Oxford Economics
10
1998
2002
2006
2010
Medium-term challenge of rebuilding household balance
sheets cannot be avoided
World: household savings ratios
Savings rate, %
16
Eurozone big-4
14
12
10
8
UK
6
4
2
0
US
-2
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Source : Oxford Economics/Haver Analytics
11
The UK Forecast
Oxford Economics’ latest UK forecast
%
September
baseline
forecast
September
extended credit
crunch
November
baseline
forecast
GDP
growth
2008
2009
2010
1.2
0.5
2.2
0.9
-1.0
0.3
0.8
-1.0
0.9
CPI
inflation
2008
2009
2010
3.8
3.0
1.8
3.5
2.1
1.0
3.8
2.3
1.2
Bank rate
2008
2009
2010
5.8
4.6
4.2
5.5
4.0
3.0
4.6
2.0
2.1
50%
35%
?
Probability
13
Libor spreads widened post-Lehmans…
UK: LIBOR spread
%
7.0
6.5
3-month LIBOR
6.0
5.5
5.0
Bank rate
4.5
4.0
3.5
3.0
2.5
Jul07
Sep07
Nov07
Source : Haver Analytics
14
Jan08
Mar08
May08
Jul08
Sep08
Nov08
…and companies starting to feel the pinch
15
House price falls show no sign of slowing…
16
…and equity market sharply lower…
17
…with household wealth losses over £1.3trn
18
…and huge fall in confidence
UK: Consumer confidence
GfK NOP Index
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Haver Analytics
19
Blue Book shows even lower saving ratio…
UK: Savings ratio
%
10
8
Previous
6
4
2
Now
0
-2
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source : Oxford Economics/Haver Analytics
20
…and huge swing needed in financial balance
21
UK companies better-placed than rest of EU…
22
…but GDP down more than expected in Q3…
23
…order books collapsing…
24
…and investment intentions cut back sharply
25
Policy stance has changed dramatically…
 Bank rescue plan:
■ £50 billion to recapitalise UK banks, with £37 billion from government.
■ A new government-backed company to guarantee new short and
medium-term debt issues by banks with maturities up to three years
for use in refinancing maturing interbank borrowings. The government
expects the take-up of the guarantee to be of the order of £250 billion.
■ The Special Liquidity Scheme (SLS) has also been doubled to £200
billion.
 Cuts in interest rates – down 200bp in two months
 Prospect of fiscal action:
■ Accelerating government investment
■ Tax cuts to be announced in the PBR - £10 billion?
26
Tax cuts key to easing saving correction…
27
…which is key uncertainty in forecast
28
Implications of alternative saving ratios
%
5% saving ratio
(November
baseline)
7% saving ratio
9% saving ratio
GDP
growth
2009
2010
-1.0
0.9
-1.6
0.1
-2.5
-0.2
CPI
inflation
2009
2010
2.3
1.2
2.0
0.7
1.5
0.1
Bank rate
2009
2010
2.0
2.1
1.4
0.7
0.7
0.3
29
Oxford Economics’ 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
2007
2008
2009
2010
2011
2012
3.6
3.0
7.1
0.5
1.8
-4.5
-1.9
3.0
0.4
2.3
-3.8
-2.7
5.95
5.01
2.00
1.46
0.6
1.8
-3.2
0.0
2.2
1.9
1.1
0.8
-1.5
3.8
-2.5
-4.5
5.53
4.66
1.87
1.27
-1.4
-1.6
-3.4
-0.2
1.8
1.7
0.3
-1.0
-2.7
2.3
-2.4
-6.8
2.63
4.39
1.53
1.22
0.6
-0.4
0.7
-0.1
2.3
3.9
2.9
0.9
0.4
1.2
-2.2
-7.4
2.34
4.73
1.62
1.31
2.4
1.5
3.8
0.2
2.5
6.4
5.4
2.6
2.2
1.8
-1.9
-6.3
3.28
5.03
1.72
1.39
3.2
2.9
5.4
0.2
2.5
6.3
6.3
3.1
1.5
2.0
-2.0
-5.0
4.28
5.17
1.73
1.40
Sectors and Regions
Services an ever growing part of the economy
% GDP
90
80
Forecast
Services
70
60
50
40
30
20
Manufacturing
Construction
10
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Source: Oxford Economics
32
…and an ever rising part of employment
% Employment
90
80
Forecast
Services
70
60
50
40
30
Manufacturing
20
10
Construction
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Source: Oxford Economics
33
Finance & business growing within services
% Services GVA
45
Forecast
Other
40
35
Business
30
25
Distribution
20
15
Transport
Communication
Finance
10
5
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Source: Oxford Economics
34
…though business not finance for jobs
% Services employment
45
Forecast
Other
40
35
Distribution
30
25
Business
20
15
10
Finance
Transport
Communication
5
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Source: Oxford Economics
35
Finance & business worst hit by recession
UK employment change by broad sector (000’s)
(total employment change, 000s)
Manufacturing
Other production
Financial & business services
Other private services
Public services
Total
1978-08
-3977
-282
3735
2888
2425
4789
1998-08
-1382
272
1508
1138
1449
2985
2008-10
-193
-142
-300
-197
95
-737
2008-18
-674
74
818
416
527
1161
(average per year, 000s)
Manufacturing
Other production
Financial & business services
Other private services
Public services
Total
1978-08
-133
-9
124
96
81
160
1998-08
-138
27
151
114
145
299
2008-10
-96
-71
-150
-99
48
-368
2008-18
-67
7
82
42
53
116
Source: ONS; Oxford Economics forecasts
36
How are regional economies affected?
Type of impact
Where would we expect biggest effect?
Financial
Where greatest number of jobs are located
services industry
37
Construction
Where housing starts and office building have
been strongest
Housing
Where price disequilibria have been greatest
Consumer
Where there are highest real income effects,
consumer debts, unemployment impacts
Population
Where inward migration has been most
driven by availability of jobs
Second-round
effects
Where consumer-related industries and
services are located; areas that supply mostaffected regions
More like 1990s than 1980s
Impacts on total employment of each ‘recession’ (000’s)
South East
London
Eastern
South West
West Midlands
East Midlands
Yorkshire & Humber
North West
North East
Wales
Scotland
Northern Ireland
UK
38
1981-1983
-12
-142
1
-68
-75
-21
-80
-164
-66
-58
-82
-11
-778
1991-1993
-89
-210
-55
-76
-114
-76
-53
-94
-21
-18
-50
-6
-864
2001-2003
3
-20
68
43
18
16
86
94
40
44
12
23
429
2008-2010
-76
-211
-78
-34
-66
-43
-47
-91
-17
-20
-36
-17
-737
The forecast: Southern regions hit hardest by
contraction in jobs
Total Employment in the regional groups (1990=100)
Index (1990=100)
122
South
117
112
NIWS
Midlands
107
102
North
97
92
1990
1994
1998
Source : Oxford Economics
39
2002
2006
2010
2014
Services vital to North West economy, too…
Share of employment, 2008
Transport & comms
6%
Other personal
services
6%
Distribution & retail
17%
Hotels & catering
7%
Construction
7%
Business services
16%
Education
8%
Other
9%
Manufacturing
12%
Health
12%
Note: Other includes agriculture, extraction, utilities, financial services and public admin
40
…and critical to recovery from recession
North West employment change by broad sector (000’s)
(total employment change, 000s)
Manufacturing
Other production
Financial & business services
Other private services
Public services
Total
1978-08
-654
-50
347
215
245
102
1998-08
-174
30
178
92
153
279
2008-10
-24
-14
-27
-29
4
-91
2008-18
-88
6
65
34
35
52
(average per year, 000s)
Manufacturing
Other production
Financial & business services
Other private services
Public services
Total
1978-08
-22
-2
12
7
8
3
1998-08
-17
3
18
9
15
28
2008-10
-12
-7
-13
-15
2
-46
2008-18
-9
1
6
3
4
5
41
Conclusions
 Recession seems inevitable for UK and other developed
economies.
 Severity will be affected by scale of consumer
retrenchment.
 But policy now heavily geared to supporting growth, and
possible to see upsides as well as downsides to the
forecast.
 Services – and London – most heavily affected by
slowdown, but services are also the key to recovery.
 North West still expected to see appreciable jobs (and
population) growth in the medium term.
42