The Outlook for the UK Economy
By
Jonathan Loynes
1. Agenda
• The global situation.
• Latest news on the UK.
• How deep and how long will the downturn be?
• What does it all mean for the pound?
• Conclusions.
2. World & G7 GDP Growth (% Annual)
7
6
5
World (PPP Weights)
World (Market Exchange Rates)
G7
7
6
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
Our Forecasts
-2
-3
-3
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Sources: Thomson Datastream & Capital Economics
3. How is this Global Downturn Different?
• It’s truly global – no more talk of “decoupling”.
• Financial aspect – the credit crunch.
• Large economic imbalances to unwind.
• Falling prices for the first time in half a century?
• Unprecedented policy response.
4. UK GDP Growth (2002-2008) (Latest = Q4)
4.0
1.6
3.0
1.2
2.0
0.8
1.0
0.4
0.0
0.0
-1.0
-0.4
-2.0
% q/q (RHS)
-0.8
-3.0
% y/y (LHS)
-1.2
-4.0
-1.6
2002
2003
2004
2005
2006
2007
2008
Source: Thomson Datastream
5. House Price Inflation (% y/y) (1998-2009)
30
25
20
15
10
5
0
-5
-10
-15
-20
30
25
20
15
10
5
0
-5
-10
-15
-20
98
99
00
01
02
03
04
05
06
07
08
09
Source: Nationwide
6. UK Manufacturing Output Growth (2002-2009)
65
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
60
55
50
45
CIPS/RBS Output Balance (LHS)
40
Manufacturing Output (%y/y, RHS)
35
30
02
03
04
05
06
07
08
09
Sources: Thomson Datastream & NTC Research
7. Unemployment (000s) (1997-2009)
2500
2500
Claimant count (LHS, 000s)
2000
ILO (RHS, 000s)
2000
1500
1500
1000
1000
500
500
97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Thomson Datastream
8. Previous UK Recessions
% drop in output relative to...
Length of
recession
(quarters)
Starting point
If economy had
grown at trend
Mid 1940s
12
13.1
21.2
Mid 1950s
4
0.5
3.2
Early 1960s
2
0.8
2.1
Mid 1970s
9
3.3
9.4
Early 1980s
9
6.1
12.0
Early 1990s
8
2.5
7.9
Source: Capital Economics
9. Potential Steps Out of a Recession
No of quarters before real
GDP starts to rise
Consumer confidence starts to rise
4 to 5
Non-financial share prices start to rise
2 to 4
Business confidence starts to rise
2 to 3
CBI output exp. balance starts to rise
2 to 3
New dwelling starts begin to rise
1 to 3
CBI inv. intentions start to rise
1 to 2
CBI stocks balance starts to fall
1 to 2
New car registrations start to rise
1
Real GDP starts to rise
0
Source: Capital Economics
10. Consumer Confidence (1997-2008)
(Latest = January)
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
GfK/NOP Composite Index
MORI Economic Optimism Index
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Thomson Datastream
11. UK Bank Lending(%y/y) (1991-2008)
20
20
15
15
10
10
5
5
0
0
-5
Private non-financial companies
Households
-10
-5
-10
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Bank of England
12. Measures to boost bank lending
• Liquidity facilities (SLS/Discount Window) - £250bn.
• Capital injection - £50bn.
• Credit guarantee scheme - £200bn.
• Guarantee for asset-backed securities (Crosby) - £100bn?
• Asset protection scheme (insuring toxic assets) - £120bn?
• Asset purchase facility (BoE) - £50bn to £?bn
• Conditions attached/Northern Rock & RBS.
13. CPI & RPI Inflation (%y/y) (2004-2010)
(Latest = January)
6
6
5
Forecasts
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
CPI inflation
RPI inflation
-3
-3
-4
-4
04
05
06
07
08
09
10
Source: Thomson Datastream, Capital Economics
14. UK Interest Rate (2000-2010)
7
7
F'cast
6
6
5
5
4
4
3
3
2
2
1
1
0
0
00
01
02
03
04
05
06
07
08
09
10
Source: Thomson Datastream, Capital Economics
15. Household Inflation Expectations (%)
(2004-2009) (Latest = January)
50
5.0
4.5
4.0
3.5
Bank of England (LHS)
YouGov/Citigroup (LHS)
40
GfK NOP (RHS)
30
3.0
20
2.5
2.0
10
1.5
0
1.0
-10
0.5
0.0
2004
-20
2005
2006
2007
2008
2009
Source: Bank of England, Citigroup, GfK
16. Sterling Index & UK Export Growth
(1990 - 1998)
110
105
Sterling Trade-Weighted Index (LHS)
Goods Export Volmes (%3m y/y RHS)
25
20
ERM exit
100
15
95
10
90
5
85
0
80
-5
75
-10
1990 1991 1992 1993 1994 1995 1996 1997 1998
Source: Thomson Datastream
17. UK GDP Growth (% y/y) (1990 – 2010)
6
6
5
5
CE Forecasts
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
90
92
94
96
98
00
02
04
06
08
10
Source: Thomson Datastream & Capital Economics
18. What will recovery look like?
• Some financial activity lost for good?
• Prolonged period of weakness in household spending.
• Taxpayers will have to pay for crisis measures.
• Export sectors may eventually do well.
• Geographical re-balancing?
• Trend growth weaker?
19. UK Real GDP (£bn)
1400
1400
1200
1200
1000
1000
800
800
600
600
400
400
200
200
0
1900
0
1925
1950
1975
2000
Source: Thomson Datastream
20. Sterling Exchange Rates (2006-2009)
110
2.2
105
2.0
100
1.8
95
1.6
90
1.4
85
80
75
Sterling Trade-weighted Index (LHS)
1.2
Dollar/Pound (RHS)
1.0
Euro/Pound (RHS)
70
0.8
06
07
08
09
Source: Thomson Datastream
21. Public Borrowing (£bn) (2000-2013)
200
200
PBR 2008 Forecast
150
100
150
Capital Economics
Forecast (ex. tax changes)
100
50
50
0
0
Forecasts
-50
-50
00-01 02-03 04-05 06-07 08-09 10-11 12-13
Source: Thomson Datastream
22. Sterling TWI & CDS Spread (2008-2009)
-40
-20
0
20
40
60
80
100
120
140
160
180
100
95
90
85
80
Sterling Trade-weighted
Index (LHS)
75
UK CDS Spread (bps, RHS,
inverted)
70
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Source: Thomson Datastream
23. Euro/£ & GDP Growth Forecasts (2007-2009)
1.60
0.6
0.4
1.50
0.2
1.40
0.0
1.30
-0.2
1.20
euro/£ (LHS)
-0.4
1.10
UK minus euro-zone GDP 2009
(%y/y, RHS)
UK minus euro-zone GDP 2008
(%y/y, RHS)
-0.6
1.00
0.90
-0.8
-1.0
-1.2
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09
Source: Thomson Datastream
24. German Exports & PMI Export Orders
(1999-2009)
65
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
60
55
50
45
40
35
30
PMI survey of manuf. export
orders (adv. 6m, LHS)
25
Export values (3m % y/y, RHS)
20
99
00
01
02
03
04
05
06
07
08
09
Source: Thomson Datastream
25. Conclusions
• UK recessions “normally” last about two years.
• But this is no normal downturn.
• Timing of recovery rests crucially on when banks lend.
• UK economy to contract both this year and next.
• But sterling adjustment may be largely over.
• Euro’s turn to fall?
• Pound to rise to €1.25? Health warnings apply!