ian mccafferty presentation
DESCRIPTION
Presentation given by the CBI’s chief economic adviser, Ian McCafferty to more than 160 guests at a CBI lunch sponsored by the Bank of IrelandTRANSCRIPT
Economic OutlookChallenges for business
Ian McCaffertyChief Economic AdviserCBI
A divergent and uncertain global recovery
• 2011 Growth pause• Commodity prices, supply chain
disruptions, China slowdown
• The outlook for 2012-13• 1-2-6 world• Critically dependent on avoiding big risks
Jan-
10 Feb Mar Apr
May Ju
n Jul
Aug Sep Oct
Nov Dec
Jan-
11 Feb Mar Apr
May Ju
n Jul
Aug Sep Oct
Nov Dec
Jan-
12 Feb Mar
-20%
0%
20%
40%
60%
80%
HWWI Commodity Price Indices ($)
All Commodities Excl. Energy% yr/yr
2008 2009 2010 2011
-14%
-9%
-4%
1%
6%
120
130
140
150
160
170
180
World Trade Volume
Growth (lhs) Level (rhs)% 3m/3m 2000=100
Q1-10 Q2 Q3 Q4 Q1-11 Q2 Q3 Q4 Q1-12
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Advanced economy growth rates
US Eurozone Japan% q/q (real)
Q1 2012 outturn data only available for the US
Risks: oil and commodity prices
Jan-11Feb Mar Apr May Jun Aug Sep Oct Nov DecJan-12Feb Apr80
85
90
95
100
105
110
115
120
125
130Oil prices$ per barrel
2007 2008 2009 2010 2011 20120
50
100
150
200
250
Food Metals Non-food argiculturals
Non-oil commodity prices2007=100
● Pressure on oil prices: supply concerns arising from political instability in MENA, embargo on Iran, disruptions in South Sudan; risk premium around $20pb
● Market fundamentals tight: some scope for Saudi supply replacement
● Medium-term trend in prices is firm: strong EME demand, alongside constrained supply
● Record sterling and euro prices: close to historical tipping point for economic activity?
Risks: How will the Euro crisis play out?
Jan Feb Mar Apr May0
10
20
30
40
50
60
Periphery Maturing Debt
Greece Portugal Ireland Spain Italy
€bn
Source: Goldman Sachs
Netherlands
Slovakia
Cyprus
Austria
Belgium
Portugal
France
Germany
Italy
Spain
Greece*
0 5 10 15 20 25 30
EBA: Aggregate Capital Shortfalls
€bnSource: European Banking Authority * Greek recap needs based on EU/IMF requirements that exceed EBA standards
• The ECB has bought time
• ECB LTRO: “lender of last resort”, reduced some market risks
• But governments must deliver a systemic solution to the underlying causes of the crisis
• New & rigorous fiscal architecture
• Bank recapitalisation
• Joint debt responsibility
• Supply side reform
• Competitiveness imbalances
• Short to medium-term growth package
• 2012 a testing time
• Sovereign debt rollovers; bank refinancing
• Difficult political climate
Risks: policy error/political shifts
Elections and other political tensions could easily lead to policy error
• French elections (May)
• US elections (November)
• UK coalition tensions (growing)
• Middle East (volatile)
• Rogue states (unpredictable)
Global outlook 2012-132012-2013: Global growth prospects looking up – but dependent on Eurozone outcomes
• Modest recovery in advanced economies:
• US and Japan are sustaining momentum
• Euro area will be weak – prone to strong downside risks
• EMEs will underpin global growth
• Outlook vulnerable to elevated oil prices and developments in the Euro area.
World GDP Growth
2011 2012 2013
World 3.8 3.3 4.1
Advanced economies: 1.6 1.4 2.3
USA 1.7 2.4 2.7
Euro Area 1.5 -0.4 0.9
Japan -0.7 1.8 2.5
Germany 3.1 0.6 1.7
France 1.7 0.1 1.2
Italy 0.5 -1.6 -0.1
Spain 0.7 -0.9 -0.2
UK 0.7 0.6 2.0
Emerging economies: 6.4 5.6 6.4
China 9.2 8.6 8.8
India 7.1 6.1 7.1
Brazil 2.7 3.2 5.0
Russia 4.3 4.3 4.2
Africa 3.5 3.2 4.5
2007 2008 2009 2010 2011 2012 2013-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0Advanced economies Emerging economies
Contributions to world GDP growthpp
Eurozone overview 2012-13
2011 2012 2013
Euro area 1.5 -0.4 0.9
Germany 3.1 0.6 1.7
France 1.7 0.1 1.2
Italy 0.5 -1.6 -0.1
Spain 0.7 -0.9 -0.2
Greece -6.9 -6.7 -1.8
Latest Euro area growth forecasts2012-2013: Core and periphery diverging
• Modest “recession” underway, but sluggish growth should resume if the crisis remains contained
• Germany to lead the recovery, helped by relatively robust domestic demand
• France, Scandinavia and Austria to regain momentum from H2 2012; deeper downturn in Netherlands
• Austerity tightening in Italy and Spain, worsening the growth outlook; Greece and Portugal in deep recessions
• Headline inflation is falling as energy prices decline – ECB so far cautious about cutting interest rates
• Unemployment set to rise throughout 2012 and into 2013 – despite a continuing fall in Germany
• Impact from disorderly resolution to the euro crisis would be huge
2008 2009 2010 2011
30
35
40
45
50
55
60
Eurozone Purchasing Managers Indices
Overall Services Output Manufacturing50.0 = No Change
2012 set to be another difficult year; some momentum building up through 2013
• H1 2012 “bumping along the bottom”; momentum picking up in H2. Pace of recovery into 2013 crucially dependent on corporate confidence
• Fiscal headwinds/sluggish consumers will constrain domestic demand; some recovery in exports; corporate investment?
• Inflation falling but sticky; unemployment will continue to rise
2004 2005 2006 2007 2008 2009 2010 2011 2012 20131.0
1.4
1.8
2.2
2.6
3.0
2008 2009 2010 2011 2012 2013-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
340
345
350
355
360
365
370Growth (lhs) Level (rhs)
UK overview 2012-13
2011 (outturn) 2012 2013
GDP 0.7 0.6 2.0
Household Consumption -1.2 0.2 1.6
Manufacturing output 2.0 -0.9 1.8
Consumer Prices 4.5 3.0 2.2
Unemployment (%) 8.1 8.6 8.8
Latest UK Forecast
ILO unemploymentMillions
CBI GDP forecast% q/q
£bn, 2008 prices
CBI forecast
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
20
11
-12
20
12
-13
20
13
-14
20
14
-15
20
15
-16
20
16
-17
-2
-1
0
1
2
3
4
5
6
7
UK: fiscal and monetary policy
• Austerity package under pressure• Deficit elimination two years later• Debt peaks at 78%
• Impact on economy
• Annual drag on GDP of ~0.5% points
• Credibility premium delivers looser monetary policy
• Monetary policy to remain accommodative
• Low rates into 2013
• More QE?
• Fiscal policy: sticking to Plan A
• 2012 Budget• Need for Growth Agenda
Growth in planned public spendingReal % rise
2009
-10
2010
-11
2011
-12
2012
-13
2013
-14
2014
-15
2015
-16
2016
-17
0.0
2.0
4.0
6.0
8.0
10.0
12.0Public sector net borrowing
Structural Cyclical
% GDP
Chart excludes the impact of the transfer of Royal Mail pension
fund assets in 2012/13
UK: a constrained economy
End of the “Nice Decade”
• Legacy impacts from the financial crisis
• Bank recapitalisation• Consumer deleveraging• Fiscal austerity
• Growth constrained for some time
Source: IMF
Fiscal policy contraction
Monetary policy tightens
Oil shocks
External demand shock
Financial crises
Big 5 financial crises
0 1 2 3 4 5 6 7 8
Output loss % from peakDuration (quarters)
Shocks and Recessions
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20070.0
1.0
2.0
3.0
4.0
5.0
6.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
The ‘nice’ decade: world GDP growth & inflation% yoy
UK: rebalancing in a changing world
• UK must shift to a different model of growth
• Investment and net trade• Broader sectoral contributions• Financed by savings not debt
• Against backdrop of global change
• Emerging market growth• Rapid digitalisation• Shifting demographics• Growing resource constraints
Rebalancing GDP growth
Series1-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0.5%
-0.2%
0.4%1.0%
-0.3%
0.9%
1.7%
0.4%
2008
2020
0 1 2 3 4 5 6 7
£1.4tr
£6tr
Compound annual growth: 13%
Disposable income in China rising
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
8
9
10
11
12
13
14
15 Ageing of UK population
Number of people aged 65+
Growth 2.3% p.a.
C
I
G
X-M
C
I
X-M
G
Growth 2.1% p.a.
1997 - 2009 2011 - 2015
Economic OutlookChallenges for business