roger bootle citywire (3rd may) e mail version
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The Economic and Financial Outlook
By
Roger Bootle
1. Agenda
• The shape of the world.
• The outlook for America.
• The euro: survival or implosion?
• Prospects for the UK.
• The outlook for interest rates.
2. Capital Economics GDP Forecasts
(% y/y) – Year Average
2010 2011 2012 2013
US 3.0 1.7 2.0 2.5
Euro-zone 1.8 1.5 -1.0 -2.5
UK 2.1 0.7 -0.5 0.5
Japan 4.0 -0.9 1.5 1.0
Emerg. Markets 7.3 6.8 5.2 5.0
China 10.4 9.2 8.5 7.5
Sources: Thomson Datastream, Capital Economics
3. GDP (Q1 2008 = 100) (Latest = Q4 2011)
Source: Thomson Datastream
90
92
94
96
98
100
102
90
92
94
96
98
100
102
2008 2009 2010 2011
USGermanyFranceJapanUK
4. Exports (% of GDP) (2010)
Sources: Thomson Datastream, Capital Economics
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
Emerging Europe
Emerging Asia
Latin America Middle East
Exports to the euro-zone
Exports to the US
5. US GDP (%q/q Annualised) (2009 – 2013)
(Latest = Q4)
Sources: Thomson Datastream, Capital Economics
-8
-6
-4
-2
0
2
4
6
-8
-6
-4
-2
0
2
4
6
2009 2010 2011 2012 2013
Forecasts2012 = 2.0%
2013 = 2.5%
6. US GDP (%y/y) (1990 – 2011) (Latest = Q4)
Source: Thomson Datastream
-6
-4
-2
0
2
4
6
8
-6
-4
-2
0
2
4
6
8
1990 1993 1996 1999 2002 2005 2008 2011
Mexican Peso Crisis
Asian Crisis
7. US Government Net Debt (As a % of GDP)
(1940 – 2020)
Source: Thomson Datastream
0
20
40
60
80
100
120
0
20
40
60
80
100
120
1940 1960 1980 2000 2020
CEForecast
8. Average GDP growth (1999-2011) (%y/y)
Source: Thomson Datastream
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
9. GDP growth (2011) (%y/y)
Source: Thomson Datastream
-8
-6
-4
-2
0
2
4
-8
-6
-4
-2
0
2
4
10. GDP (Q1 2008 = 100) (Latest = Q4 2011)
Source: Thomson Datastream
80
82
84
86
88
90
92
94
96
98
100
80
82
84
86
88
90
92
94
96
98
100
2008 2009 2010 2011
Portugal
Spain
Italy
Ireland
Greece
11. Current Account (% of GDP) (2011)
Source: Thomson Datastream
Gre Por Spa Ita Fra EZ Bel Fin Ire Aus Ger Net-12
-10
-8
-6
-4
-2
0
2
4
6
8
-12
-10
-8
-6
-4
-2
0
2
4
6
8
Surplus
Deficit
12. The International Net asset Position of
various countries (% of GDP) (2010)
Source: Thomson Datastream
Por Gre Ire Sp It Fra Ger-120
-100
-80
-60
-40
-20
0
20
40
60
-120
-100
-80
-60
-40
-20
0
20
40
60
net creditors
net debtors
13. Public Sector Debt (As a % of GDP)
(2011 Forecast)
Source: Capital Economics
60 % Maastricht Treaty
Reference Value
0
20
40
60
80
100
120
140
160
180
0
20
40
60
80
100
120
140
160
180
Fin Net Spa Aus Ger Fra Bel Por Ire Ita Gre
14. Banks’ Exposures to Peripheral Economies
(As a % of GDP) (Q1 2011)
Source: BIS
0
5
10
15
20
25
0
5
10
15
20
25
30
Gre Ita Aus Spa Ire Ger Net Bel Por Fra
15. UK Banks’ Exposures to Euro-zone
(As a % of Tier 1 Capital) (Q3 2011)
Sources: Thomson Datastream, Bank of England
0
20
40
60
80
100
0
20
40
60
80
100
Greece Portugal Italy Spain IrelandGermanyFrance
Public sector
Banks
Non-bank private sector
16. Unit Wage Costs (1999 – 2010)
(1999 = 100) (Latest = 2010)
Source: OECD
90
100
110
120
130
140
150
90
100
110
120
130
140
150
99 00 01 02 03 04 05 06 07 08 09 10 11
Greece
Portugal
Ireland
Spain
Italy
France
Germany
17. The future of the euro
• Badly conceived from the start.
• Requires fiscal and political union.
• This cannot work for the current membership.
• The euro should split into two - north and south.
• More likely, Greece will leave, later followed by
other countries.
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0.50 cm
0.2 inches
11.70 cm
4.61 inches
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18. Contributions to Change in Real GDP
(By Expenditure Component)
(%, Q1 2008 – Q4 2011)
Source: Thomson Datastream
-4
-3
-2
-1
0
1
2
3
4
-4
-3
-2
-1
0
1
2
3
4
H'hold Spending
Gov't Spending
Investment Net Trade
UK Other G7
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4.61 inches
0.50 cm
0.2 inches
0.50 cm
0.2 inches
11.70 cm
4.61 inches
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3. Select ’OK’ 19. UK Real Household Disposable Income
& Spending (% y/y)
Sources: Thomson Datastream, Capital Economics
-4
-3
-2
-1
0
1
2
3
4
5
-4
-3
-2
-1
0
1
2
3
4
5
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Real disposable income
Real household spending
Forecasts
20. Household Debt (As a % of Income)
(1988 – 2013) (Latest = Q4 2011)
Sources: Thomson Datastream, Capital Economics
80
90
100
110
120
130
140
150
160
170
180
80
90
100
110
120
130
140
150
160
170
180
88 90 92 94 96 98 00 02 04 06 08 10 12
CE Forecast
21. Level of Real Household Spending
(Q4 2007 = 100) (2000 – 2016) (Latest = Q4 2011)
Sources: Thomson Datastream, Capital Economics
75
80
85
90
95
100
105
75
80
85
90
95
100
105
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
CE Forecasts
2012: -1.0%2013: +0.5%
Lost decade
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11.70 cm
4.61 inches
0.50 cm
0.2 inches
0.50 cm
0.2 inches
11.70 cm
4.61 inches
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22. Unemployment (ILO Measure) (%)
(Latest = Feburary)
Source: Thomson Datastream
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Forecast
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3.15 Inches
11.70 cm
4.61 inches
0.50 cm
0.2 inches
0.50 cm
0.2 inches
11.70 cm
4.61 inches
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23. UK Trade in Goods (£bn, % y/y)
(Latest = February)
Source: Thomson Datastream
1
-30
-20
-10
0
10
20
30
-30
-20
-10
0
10
20
30
08 09 10 11 12
Exports
Imports
24. Destination of UK Goods Exports
(As a % of Total) (2011)
Source: Thomson Datastream
Euro-zone
Other Europe
N. America
Other OCED
Oil exporters
Asia
Rest of world
25. Sterling TWI & Sterling Export Prices
(2000 – 2012) (Jan. 2007 = 100) (Latest = Mar.)
Source: Thomson Datastream
70
80
90
100
110
120
130
70
80
90
100
110
120
130
00 01 02 03 04 05 06 07 08 09 10 11 12
Sterling export prices
Sterling TWI
26. UK Public Sector Borrowing As a % of GDP
(Latest = 2010/11)
Sources: OBR, Capital Economics
0
20
40
60
80
100
120
140
160
180
0
20
40
60
80
100
120
140
160
180
05/06 07/08 09/10 11/12 13/14 15/16
OBR Budget 2012 Forecast
CE forecast
Including the effect of the transfer of Royal Mail pension scheme
27. Net debt as a share of GDP (%) (2000-2017)
Sources: OBR, Capital Economics
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
40
50
60
70
80
90
100
00/01 03/04 06/07 09/10 12/13 15/16
CE
OBR Budget 2012 Forecast
28. Commodity Prices (Jan. 2000 = 100)
(Latest = 18 Apr)
Sources: Thomson Datastream
0
100
200
300
400
500
600
700
0
100
200
300
400
500
600
700
00 01 02 03 04 05 06 07 08 09 10 11 12
Energy
Industrial Metals
Agriculturals
29. International Measures of Core Inflation (%)
(2004 – 2011) (Latest = March)
Source: Thomson Datastream
0
1
2
3
4
0
1
2
3
4
04 05 06 07 08 09 10 11 12
UK
US
Euro-zone
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8.00 cm
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11.70 cm
4.61 inches
0.50 cm
0.2 inches
0.50 cm
0.2 inches
11.70 cm
4.61 inches
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30. UK Average Earnings (2001-2013) (% y/y)
(Latest = February)
Source: Thomson Datastream
-3
-2
-1
0
1
2
3
4
5
6
7
-3
-2
-1
0
1
2
3
4
5
6
7
01 02 03 04 05 06 07 08 09 10 11 12 13
Forecast
Average
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7.40 cm
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6.00 cm
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8.00 cm
3.15 Inches
11.70 cm
4.61 inches
0.50 cm
0.2 inches
0.50 cm
0.2 inches
11.70 cm
4.61 inches
To view Deloitte drawing guides:
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31. UK Consumer Price Inflation (%)
(Latest = March)
Sources: Thomson Datastream, Capital Economics
-2
-1
0
1
2
3
4
5
6
-2
-1
0
1
2
3
4
5
6
06 07 08 09 10 11 12 13
Headline CPI inflation
Core CPI inflation
2% target
Forecasts
Sources: Thomson Datastream, Capital Economics
32. Capital Economics Rate Expectations (%)
(2000 – 2013)
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
00 01 02 03 04 05 06 07 08 09 10 11 12 13
USEuro-zoneUKJapan
Capital Economics
Forecasts
Sources: Thomson Datastream, Bloomberg, Capital Economics
33. UK 20 year Gilt Yields & CPI Inflation
00 01 02 03 04 05 06 07 08 09 10 11 12 130
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7 CPI Inflation (% y/y)
20-year gilt yield (%)
Sources: Bank of England, Capital Economics
34. Outstanding Stock of Gilts (£bn)
0
250
500
750
1000
1250
1500
0
250
500
750
1000
1250
1500
00 02 04 06 08 10 12
Gilts held by the market
Gilts held by the Bank of England
Total gilt stock
Based on £500bn of QE and DMO projections for gilt issuance
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4.61 inches
0.50 cm
0.2 inches
0.50 cm
0.2 inches
11.70 cm
4.61 inches
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35. All-Property Initial Yields and 10-Year
Government Bond Yields (%) (1989 – 2013)
(Latest = March 2012)
Sources: IPD, Thomson Datastream, Capital Economics
0
2
4
6
8
10
12
14
0
2
4
6
8
10
12
14
89 91 93 95 97 99 01 03 05 07 09 11 13
Property initial yields
10-year gilt yields
Forecast
Sources: Shiller, Capital Economics
36. US PE Ratio (Earnings 10 Year Average)
(1881 – 2012) (Latest = April)
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
1881 1901 1921 1941 1961 1981 2001
Historical Arithmetic Average = 16.4
Latest = 22.2
Source: Thomson Datastream
37. UK PE Ratio (Earnings 10 Year Average) (Datastream
All Share) (1975 – 2012) (Latest = March)
0
5
10
15
20
25
30
0
5
10
15
20
25
30
75 78 81 84 87 90 93 96 99 02 05 08 11
Average since 1975 (14.8)
Latest = 12.6
38. Developed & Emerging Market Equity Indices
(1st Jan. 2011 = 100) (Latest = 20th Apr.)
Source: Thomson Datastream
70
75
80
85
90
95
100
105
110
70
75
80
85
90
95
100
105
110
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
Developed Markets
Emerging Markets
39. Why rapid GDP growth doesn’t always
mean stronger equity performance
• Quoted companies do not reflect economy
as a whole.
• Lack of transparency.
• Higher economic and political risks
generally.
40. Conclusions
• Asia to continue to grow strongly.
• The US, euro-zone and UK will continue with austerity
and face a long slog back to prosperity.
• Inflation will fall sharply.
• Interest rates will remain at near-zero for years.
• The euro will not survive in its present form.
• More QE if the recovery falters.
• Gilt yields at this level – or lower – for several years.
• Outside the US, equities fair value.
The Economic and Financial Outlook
By
Roger Bootle