north hants june 2011
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Inspirational presentation from Nick Parsons,Head of Research, UK and Europe and Global Head FX Strategy | Wholesale Banking | National Australia Bank LimitedTRANSCRIPT
11
The UK and World Economy:Global boom, domestic gloom ’A Presentation for clients in Yorkshire’
Nick ParsonsHead of Research UK and Europe, Global Head FX ResearchNational Australia Bank,[email protected]
June 16-17th 2011
2
The world economy
3
● The global economy was worth 61,963,000 million US dollars at the end of 2010.
● GDP of the wealthiest country is more than twice the second placed country and three times as much as the third.
● The top four countries account for half the world’s GDP.
● The United Kingdom is still the world’s 6th largest economy
World
Source: Bloomberg, National Australia Bank Research
2010 Global economic league table (GDP USD millions)
1 United States 16,106,896 11 India 1,430,020
2 China 5,745,133 12 Spain 1,374,779
3 Japan 5,390,897 13 Australia 1,219,722
4 Germany 3,305,898 14 Mexico 1,004,042
5 France 2,555,439 15 South Korea 986,256
6 United Kingdom 2,258,565 16 Netherlands 770,312
7 Italy 2,036,687 17 Turkey 729,051
8 Brazil 2,023,528 18 Indonesia 695,059
9 Canada 1,563,664 19 Switzerland 522,435
10 Russia 1,476,912 20 Belgium 461,331
4
Advanced economies are no longer driving global GDP growth ● Up to 2000, global growth was driven largely by industrialised nations, but the sharp slowdown in activity following the dotcom bust was followed by the rise in emerging markets.
● All three country blocs suffered a similar “V shaped” slowdown and recovery
● The key point is that Emerging and developing economies never crossed the zero line: there was no recession
● Going forward, industrialised countries will become much less important drivers of global growth.
World
Source: IMF WEO, National Australia Bank Research
-4
-2
0
2
4
6
8
10
1980 1987 1994 2001 2008
Emerging and developing economies
Advanced economies
World
GDP growth (% y/y)
2015
5
Asia and Emerging Markets are driving the global economy ● This chart of industrial output levels from 2007 – when economies were already starting to slow – is a good example of de-coupling in action, with advanced economies yet to recover to the point where industrial output has recovered from the GFC.
● By comparison, EM and Asian economies are surging with IP in the latter up 50% from 2007.
● Total industrial output of G7 economies and the seven largest EM economies rise above its pre-recession peak – 17 months after the downturn. Since that point G7 IP has risen 4%, while IP from Asia is up 32%.
World
Source: Bloomberg, ,National Australia Bank Research
80.0
90.0
100.0
110.0
120.0
130.0
140.0
150.0
160.0
07 08 09 10
Industrial Production (Jan 2007- 100)
WorldEmerging markets
Advanced Economies
Asia
6
After sharp G10 slowdown in 2009, growth now picking up across the world ● China and India grew strongly despite global downturn. Without their contribution, world economy would have shrunk more than 2% in 2009.
● Massive fiscal and monetary policy stimulus saw global growth rebound sharply in 2010.
● In both 2010 and 2011, global economic growth should be back above the average of the last 25 years.
● UK will be slowest growing major economy both in 2011 and 2012
World
Source: National Australia Bank Research
Annual Average 2007 2008 2009 2010 2011 (f) 2012 (f)
US 2.1 0.4 -2.4 3.1 2.8 3.2
Japan 2.3 -1.2 -5.1 3.1 0.0 3.7
UK 2.6 0.8 -4.3 1.4 1.3 1.8
Eurozone 2.7 0.5 -4.0 1.7 2.1 1.8
Canada 2.5 0.4 -2.7 3.2 2.8 3.0
Australia 4.0 3.1 0.5 3.5 2.1 4.4
New Zealand 3.2 0.0 -1.6 2.8 1.4 3.6
China 11.8 9.5 8.7 10.5 9.3 8.2
India 9.2 7.5 6.8 8.4 8.1 7.4
Latin America 5.4 4.1 -2.0 6.5 5.0 4.0
World 5.0 3.0 -1.1 4.6 4.2 4.2
77
UK economic outlook 2011
8
Post-recession recovery has so far been in line with both of the last two ● In the first six quarters from 1981, output rose 3.1%. In 1992 it rose 2.0% and for the six quarters beginning Q4 2009 we now expect an increase of around 2.7%.
● So, after the deepest and longest UK recession, the recovery has so far been broadly in line with the last two.
United Kingdom
Source: Datastream, National Australia Bank Research
0
0.5
1
1.5
2
2.5
3
3.5
1 2 3 4 5 6
1981
1992
2009
0
Cumulative increase (%)
9
A comparison of the last three UK recessions ● The latter stages of both previous recessions have been characterised by a mix of positive and negative growth.
● In early 1980’s recovery, there were two quarters of zero growth.
● In 1990-92, growth moved negative after what initially looked like recovery.
● Weather-affected Q4 2010 currently estimated at -0.6%, Q1 2011 +0.6%.
● Q13 from onset of recession has generally seen an acceleration of growth but not expected in Q2 2011
United Kingdom
Source: Datastream, National Australia Bank Research
-3
-2
-1
0
1
2
1 2 3 4 5 6 7 8 9 10 11 12 13 14
December 1979
June 1990
March 2008
GDP q/q % change
10
Risks around the central growth forecast ● The risk profile around the central forecast is skewed to the downside given uncertainties around activity and consumer confidence in the wake of the Comprehensive Spending Review, petrol prices and VAT.
● Upside risks centre on UK export performance and corporate profitability driving business investment.
● Downside risks are weak personal consumption, the ongoing impact of the credit crunch on loan availability and a rapid fiscal adjustment.
United Kingdom
Source: Datastream, National Australia Bank Research
-3
-2
-1
0
1
2
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
GDP q/q % change
1111
Government deficit and debt drag on growth
12
UK Debt and Deficits relative to other EU members: the starting point ● Deficits are debt are two separate concepts
● Deficit is the total amount borrowed in any one year
● Debt is the cumulative total of all previous deficits
● The UK does not have a ‘debt problem’ – debt/GDP ratio is lower than the average of the euro are and broadly in line with France and Germany
● UK problem is the deficit; the rate at which it is adding to previous debt total.
United Kingdom
Source: European Commission, National Australia Bank Research
Gross Debt (% of GDP) 2009
HungaryAustria
Belgium
Bulgaria
Cyprus
Czech Republic
DenmarkEstonia
Finland
France
Germany
GreeceIreland
Italy
Latvia
Lithuania
Luxembourg
MaltaNetherlandsPoland
Portugal
SlovakiaSlovenia
Spain
Sweden
UK
Euroarea
Romania
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%0% 20% 40% 60% 80% 100% 120%
Fiscalbalance
(% of GDP)2009-10
Euro average
Maastricht Treaty Limits
UK has 3rdhighest deficit/GDP ratio, though total debt is below EU average
13
UK Debt and Deficits relative to other EU members: the target ● The Coalition Government has an extremely ambitious deficit reduction programme
● By 2014, the deficit is projected to be just 2.5% of GDP; an unprecedented degree of fiscal tightening
● This would take it well below the average of the euro area and, ironically, mean it was the only major economy to be meeting the Maastricht Criteria
United Kingdom
Source: European Commission, National Australia Bank Research
Gross Debt (% of GDP) 2009
HungaryAustria
Belgium
Bulgaria
Cyprus
Czech Republic
DenmarkEstonia
Finland
France
Germany
GreeceIreland
Italy
Latvia
Lithuania
Luxembourg
MaltaNetherlandsPoland
Portugal
SlovakiaSlovenia
Spain
Sweden UK
Euroarea
Romania
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%0% 20% 40% 60% 80% 100% 120%
Fiscalbalance
(% of GDP)2009
Euro average
Maastricht Treaty Limits
By 2014, UK deficit is now projected to be just 2.1% of GDP; an unprecedented fiscal tightening
14
HMT/OBR budget forecasts for public sector borrowing (PSBR) ● The table shows the forecasts from the Emergency Budget on 22 June 2010, the updates in the Autumn Statement and those presented in the March Budget on 23 March 2011.
● Total borrowing in the 5 years 2010-2014 is projected to increase by £484bn, more than the £451bn estimated in June but still less than the staggering £706bn forecast in March 2010.
● We think these PSBR projections are overoptimistic. We still look for net borrowing around £70bn in 2014-15.
United Kingdom
Source: HM Treasury, National Australia Bank Research
Outturn2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16
Net borrowingJune forecast 154.7 149.1 116 89 60 37 20November forecast 156.0 148.5 117 91 60 35 18Change 0.4 -2.6 4 10 10 11 11March forecast 156.4 145.9 122 101 70 46 29
Net borrowingJune forecast 11.0 10.1 7.5 5.5 3.5 2.1 1.1November forecast 11.1 10.0 7.6 5.6 3.5 1.9 1.0Change 0.0 -0.1 0.3 0.6 0.6 0.6 0.6March forecast 11.1 9.9 7.9 6.2 4.1 2.5 1.5
Percent of GDP
Forecast
15
Peripheral European Bond yields surge as deficits increase ● Surge in Greek bond yields in Q1 2010 sent a warning shot across the bows for the Labour Government. Narrative shifted from ‘investing’ to deficit reduction.
● Market reaction to Alistair Darling’s last Budget was positive, with further falls in bond yields after the General Election and the Emergency Budget in June 2010. IMF written expressions of support have subsequently help keep UK yields down.
● Without a credible deficit reduction plan, UK bond yields would be much higher.
United Kingdom
Source: Datastream, National Australia Bank Research
2009 2010 20110
2
4
6
8
10
12
14
16
18
Ireland
UK
Greece
Germany
1616
Inflation
17
UK Consumer Price Inflation on an upward trend for last decade ● CPI inflation has been trending higher for over a decade.
● In the NICE period 2000-2005 (Non-Inflationary Constant Expansion) inflation was held down by cheap Chinese exports and strength of sterling.
● Oil-driven spike in 2008 was reversed in 2009.
● VAT hike from 17.5% to 20% in January 2011 added around 1.2% to CPI.
● Underlying trend of CPI inflation is still above 3.0%
United Kingdom
Source: Datastream, National Australia Bank Research
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201100.501.001.502.002.503.003.504.004.505.005.50
18
UK Consumer Price Inflation has been 3% or higher for past 12 months ● BoE medium-term inflation target is for harmonised CPI 2% plus or minus 1%.
● CPI has been above target for 35 out of last 41 months
● CPI has now been 3% or higher for 17 consecutive months.
● Increase in VAT will keep this measure above 3% for at least another 7 months. The BoE Governor will have to write at least another 3 letters to the Chancellor of the Exchequer.
United Kingdom
Source: Datastream, National Australia Bank Research
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201100.501.001.502.002.503.003.504.004.505.005.50
19
UK CPI Forecasts – monthly and annual rates ● VAT increase added 2.1% to the prices of those goods subject to the tax.
● Around 60% of the CPI basket is subject to VAT so the total impact is roughly (2.1 * 0.6) = +1.2%
● The impact of this will be unwound in late 2011 and early 2012.
● CPI after VAT unwind will still be above 2% target and may even still be above the top end of the target.
United Kingdom
Source: Office for National Statistics, National Australia Bank Research
Item 2009/10 2010/11
monthly annual monthly annual
January -0.2% 3.5 +0.1%4.0
February +0.4% 3.0 +0.8%4.4
March +0.6% 3.4 +0.3%4.0
April +0.6% 3.7 +0.8%4.5
May +0.2% 3.4 +0.3%4.5
June +0.1% 3.2 +0.1%4.3
July -0.2% 3.1 -0.2%4.4
August +0.5% 3.1 +0.3%4.3
September 0 3.1 +0.2%4.6
October +0.3% 3.2 +0.3%4.6
November +0.4% 3.3 +0.1%4.3
December +0.6% 2.9 +0.5%3.8
2020
Private sector drag on growth
21
UK employment and unemployment ● Total employment has fallen around 700,000 since peak in early 2008. Total employment now stands around 31,300,000.
● Claimant count unemployment rose sharply in 2008, peaking with a 138,000 increase in February 2009.
● Three out of last four months in 2011 have seen an increase in the claimant count, though the decline in employment appears to have stabilised.
United Kingdom
Source: Datastream, National Australia Bank Research
2000 2002 2004 2006 2008 2010-60-40-20
020406080
100120140160
29.5
30.0
30.5
31.0
31.5
32.0
32.5
Total employment (mn, RHS)
Monthly change in unemployment
22
UK average earnings and CPI: the squeeze on real incomes ● Average earnings growth ran consistently ahead of CPI until H2 2008.
● Last two years have seen negative real income growth, we expect a third in 2011.
● This phenomenon has only occurred twice before; in 1973-75 and 1931-33.
United Kingdom
Source: Datastream, National Australia Bank Research
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-3
-2
-1
0
1
2
3
4
5
6
7
Average earnings
CPI
23
UK consumer confidence recovering but remains fragile ● Consumer confidence plunged during recession and GFC but recovered sharply as interest rates were slashed. Real income squeeze has again depressed sentiment with recent bounce still leaving confidence below pre-recession levels.
● We expect confidence to drift sideways or even lower over next 12-18 months.
United Kingdom
Source: Datastream, National Australia Bank Research
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-40
-35
-30
-25
-20
-15
-10
-5
0
5
24
UK retail sales: slower growth has been a feature of the last decade ● Retail sales growth has been on a gradual steady decline for almost a decade.
● Growth only briefly turned negative during GFC, with the length and depth of slump far less pronounced than in early 1990’s.
● Base effects from strong sales in Summer 2010 mean annual rate likely to turn sharply lower now.
United Kingdom
Source: Datastream, National Australia Bank Research
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11-4
-2
0
2
4
6
8
10
25
Stagnant house prices will hit spending through lower equity withdrawal ● In the decade to 2007, households extracted cash from the housing market to fund consumption. This process was known as Mortgage Equity Withdrawal (MEW).
● From 2000 to March 2008 £315 billion in equity was extracted. Over the past 2 years, some £47 billion has been repaid as homeowners repay borrowings.
United Kingdom
Source: Datastream, National Australia Bank Research
-6
-4
-2
0
2
4
6
8
10
-12
-8
-4
0
4
8
12
16
20
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010
£ billions %MEW as a % of post - tax income (RHS)
MEW
26
Where RICS (Chartered Surveyors) survey leads, other indices will follow ● The RICS survey tumbled to -49 in Q4 2010 but it has subsequently recovered to -21.
● The peaking of the RICS survey in late 2006 heralded the slowdown in other surveys which began in November 2007, and it turned up 12 months in advance of other price measures.
● The HBOS measure has now been negative y/y for 7 consecutive months and we look for further modest price falls into year-end and beyond.
United Kingdom
Source: Datastream, National Australia Bank Research
2005 2006 2007 2008 2009 2010 2011 2012 2013-20
-15
-10
-5
0
5
10
15
-100
-80
-60
-40
-20
0
20
40
60% change year on year
Halifax Nationwide
RICS (RHS)
% balance
27
Mortgage approvals have rebounded from lows but historically still weak ● Mortgage approvals reached a low of just 26,600 in November 2008. The latest number was 45,200 but this is 90,000 less than the 2003 peak and well below the average of the last 20 years.
● The lack of transactions goes hand in hand with price weakness. Tighter conditions for mortgage finance are weighing on activity and depressing prices which are lower today than 12 months ago.
United Kingdom
Source: Datastream, National Australia Bank Research
92 94 96 98 00 02 04 06 08 10 1220
40
60
80
100
120
140
-20
-10
0
10
20
30
40% change year on year
House Prices (y/y % RHS)
Mortgage Approvals
000’s
35
Conclusions
36
Conclusions
● Economic growth in the developed world is likely to be relatively subdued for some time to come; the main engines of growth will be Asia and Latin America, with Japan reconstruction providing some boost in 2012.
● We have reached the limits of fiscal and monetary stimulus, which is now being reversed.
● Global economic recovery and massive UK public deficit would have put upward pressure on UK interest rates and bond yields in the absence of any credible deficit reduction plan. But, the deficit reduction plan itself will depress activity and weigh on housing affordability.
● Real incomes will be pressured by subdued earnings growth, higher inflation and pre-announced changes in allowances such as Child Benefit.
● For the UK, we expect 2011 growth of just 1.3% in 2011, rising to 1.8% in 2012.
● Whatever banks’ willingness to lend, they still face significant challenges in terms of their ability to do so.
● Property still takes up too great a share of banks’ balance sheets with limited capacity for additional net lending. We expect average house prices to fall around -4% in 2011.
● The new trend of rate growth for the UK economy is likely to be 2.0 - 2.25%; almost half a percentage point lower than the average over the past decade.
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