The “new normal” for the economy – implications for charities

Andrew Sentance, Senior Economic Adviser, PwC

CFG Annual Conference, London, 17 May 2012

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Non-oil GDP Underlying* Trend

Disappointing UK economic growth% per annum change in non-oil GDP

* Weighted average of manufacturing and services growthNote: Average non-oil GDP growth since mid-2009 = 1.4% Source -

ONS

High and volatile inflation% per annum change in UK consumer prices

Source: Office for National Statistics

1995 Jan 1997 Mar 1999 May 2001 Jul 2003 Sep 2005 Nov 2008 Jan 2010 Mar0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Inflation Target Ave 2008-11

Consumers under pressure% change in UK GDP and consumer spending

Source: ONS and March 2012 PwC economic forecast

97-07 ave 2008 2009 2010 2011 2012 2013-5

-4

-3

-2

-1

0

1

2

3

4

5

GDP Consumer spending

… while the euro crisis continues% change in GDP, 2012 PwC forecast

Russia

Germany

UK

Brazil

India

Spain

Key

Canada

Mexico

South Africa

Australia

Japan

Italy

Greece

Ireland

France

2.0

2.0

3.2

3.7

-0.7

0.1

-1.1

0.60.9

-1.4

3.3

7.5

-4.9

3.4

8.6

2.1

3.7

x.x = GDP growth in 2012

China

World growth has disappointed% change in GDP in G-13 economies*

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-3

-2

-1

0

1

2

3

4

5

6

IMF, June 2011 IMF, Apr 2012 Ave 1990-2010

* EU, US and 11 other economies accounting for 85% of world GDPSource: IMF World Economic Outlook Updates

… but emerging markets are strong% annual change in GDP in first 3 years of recovery

Source: ONS and IMF. 2011 and 2012 based on latest IMF, OECD and PwC forecasts

UK (exc

oil&

gas)

Advan

ced

econ

omie

s

Emer

ging

and

dev

elop

ing

econ

omie

s0

2

4

6

1982-84 1992-94 2010-12

The rise and rise of Asia% share of world GDP, at market exchange rates

* Includes Australia, China, India, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan Province of China and ThailandSource: IMF World Economic Outlook

1980 1990 2000 20100%

5%

10%

15%

20%

25%

30%

35%

40%

US EU-27 Asia-pacific G10*

What is the “new normal”?

2007/8 marked the end of a long and sustained expansion in UK and other Western economies

Conditions which supported this period of growth are not set to return quickly

Prolonged structural readjustment is underway in response to financial crisis and East-West rebalancing

There are significant parallels with disappointing growth and volatility of the 1970s and early 1980s

The end of a “long expansion”ave % pa increase: UK GDP and consumer spending

1948-73 1973-82 1982-2007 2007-16*0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

GDP Consumer spending* Based on PwC, OBR and other independent forecasts for 2012-2016

Source: ONS and PwC calculations

Sustaining economic growth

Sustained

economic

growth

Technology and

innovation

Private sector

expectations

Financial regime

Policy environm

ent

Key features of the “old normal”

• Financial deregulation and liberalisation

• New markets opening up as China, India, former Soviet bloc and others embrace the market economy

• Relatively low energy and commodity prices (1985-2005),

• US the dominant economic power; EU pursuing closer economic integration

• Confidence in ability of policy-makers to support growth and of independent central banks to control inflation

• Innovation and technological advance, particularly IT/comms

Forces shaping “new normal”

• Rise of Asia and other emerging markets, with associated price pressure for energy and other natural resources

• The legacy of the financial crisis

• Structural adjustment in western economies following the long expansion which ended in 2007

• Breakdown of pre-2007 policy regime and knock-on effect on financial, business and consumer confidence

Two phases of “new normal”

• Phase 1: Continuation (through mid-2010s) of current pattern of disappointing growth in western economies, with financial volatility and high and fluctuating energy and commodity prices

• Phase 2: Clearer and more sustained growth dynamic emerges, perhaps starting in the second half of this decade. Likely to be based on a different set of technological, regulatory, geopolitical and financial drivers from pre-2007 forces driving growth

• Businesses, investors and other organisations need strategies to manage and survive through Phase 1, while building potential opportunities for Phase 2.

“New normal” – Phase 1

• Prolonged period of disappointing GDP and consumer spending growth in western economies, lasting into mid-2010s

• Asia and some other emerging markets continue to perform strongly and are main engine of global growth

• Periodic bursts of inflation, driven by energy and commodity price movements, adding to growth volatility

• High prices for energy and other natural resources

• Policy-makers struggle to address medium term policy challenges

• Continuing financial market volatility

Implications for charities

• Challenging fundraising climate, with continuing pressure on discretionary spending in UK and other western economies

• Continuing economic and financial volatility, with potential future shocks. Financial resilience a key issue.

• Stresses and strains in society, creating opportunities and new pressures/challenges – eg youth unemployment

• Premium on good operational and commercial management, sound financial planning and intelligent risk appraisal

Thank you for listening.

Any questions or comments?

andrew.w.sentance@uk.pwc.com

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