World & UK outlook:
Heading for a double dip?
John Walker
Chairman, Oxford Economics
jwalker@oxfordeconomics.com
1st February 2012
Forecast comparison slide
Oxford Economics
Forecast performance compared
2007-2010
(average absolute forecast divergence for real GDP growth)
US
Eurozone
UK
Japan
OE
0.8
1.3
1.4
2.5
EIU
1.0
2.0
-
2.8
Global Insight
0.9
1.5
1.4
2.7
IMF
1.7
2.1
1.9
3.0
OECD
1.1
1.7
1.5
3.7
Consensus Economics
1.0
1.5
1.4
2.7
Note: Forecasts made in December for year ahead.
The Oxford Economics forecast
World GDP growth
% change on previous year
2010
2011
2012
2013
2014
2015
Real GDP
North America
United States
Canada
3.0
3.2
1.7
2.4
2.5
2.1
2.7
2.6
3.0
2.7
3.0
2.7
Europe
Eurozone
Germany
France
Italy
UK
EU27
1.8
3.6
1.4
1.4
2.1
1.9
1.6
3.0
1.6
0.4
0.9
1.6
-0.2
0.6
-0.2
-1.0
0.3
0.0
1.1
1.7
1.4
0.0
1.9
1.6
1.8
2.1
2.0
0.8
2.8
2.4
2.0
2.0
2.0
1.4
2.8
2.5
4.5
10.4
8.7
-1.0
9.2
7.1
1.4
8.4
6.5
3.1
8.8
8.7
2.2
8.8
9.2
1.4
8.3
8.6
3.9
2.8
2.5
3.5
3.8
3.7
Asia
Japan
China
India
World
2011 was a disappointing year
World: GDP forecasts
% year
5
Forecast
Jan11
4
3
2
Jan12
1
0
-1
-2
-3
2005
2006
2007
Source : Oxford Economics
2008
2009
2010
2011
2012
2011 was a disappointing year
A number of factors can account for weaker than expected growth
in 2011:
■ Commodity prices have remained high on supply concerns
■ Policy tightening:
● Fiscal policy in advanced economies
● Fiscal and monetary tightening in emerging markets
■ Japan’s tsunami caused severe disruptions to global supply
chains
■ Ongoing uncertainty about the Eurozone crisis and the US
debt debate dampened business and investors confidence
Commodity prices like tax rise for net importers
World: Commodity prices
2007=100 (rebased)
200
Oil
180
160
140
120
CRB foodstuffs
100
80
60
40
CRB raw industrial materials
20
2000
2002
2004
Source: Haver Analytics
2006
2008
2010
2012
2011 was a disappointing year
A number of factors can account for weaker than expected growth
in 2011:
■ Commodity prices have remained high on supply concerns
■ Policy tightening:
● Fiscal policy in advanced economies
● Fiscal and monetary tightening in emerging markets
■ Japan’s tsunami caused severe disruptions to global supply
chains
■ Ongoing uncertainty about the Eurozone crisis and the US
debt debate dampened business and investors confidence
Fiscal policy tightening more than expected
Advanced Economies: Government Balance
Emerging economies: Government balance
Change in cyclically-adjusted balance, % of GDP
1.0
Change in cyclically-adjusted balance, % of GDP
1.0
0.6
0.5
Tightening
0.7
0.5
0.1
0
0.0
Tightening
0.7
0.0
-0.1
-0.5
-0.5
-1.0
-1.0
Loosening
-1.5
-1.1
Loosening
-1.5
-1.6
-2.0
-2.0
-2.2
-2.5
2007
Source : IMF
2008
2009
-2.2
-2.5
2010
2011
2007
Source : IMF
2008
2009
2010
2011
2011 was a disappointing year
A number of factors can account for weaker than expected growth
in 2011:
■ Commodity prices have remained high on supply concerns
■ Policy tightening:
● Fiscal policy in advanced economies
● Fiscal and monetary tightening in emerging markets
■ Japan’s tsunami caused severe disruptions to global supply
chains
■ Ongoing uncertainty about the Eurozone crisis and the US
debt debate dampened business and investors confidence
Crippling uncertainty has dampened confidence
Manufacturing Purchasing Managers' Index
Index
65
China
60
55
50
45
US manufacturing ISM
40
35
Eurozone
30
2005
2006
2007
2008
2009
Source : PMI/Markit/China NBS/Haver Analytics
2010
2011
UK was below par in 2011
The UK slowed particularly sharply because of:
■ Relatively larger fiscal tightening (change in structural deficit
was 1.7% of GDP vs 0.6% in the US and nearly 1% in
Germany)
■ Monetary policy tighter than appropriate
■ Higher inflation
● Partly related to fiscal policy with VAT hike
● Partly accounted for by weakness of sterling
■ Large exposure to the Eurozone
Growth in the money supply remains very weak
UK: Broad money money measures
% year
20
M4
15
10
5
M4 excluding
other intermediate
financial corporations
0
-5
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source : Oxford Economics/Haver Analytics
Lending flows are very subdued
UK: Lending to firms and households
% year
25
All PNFCs
20
15
Households
SMEs
10
5
0
-5
-10
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source : Oxford Economics/Haver Analytics
UK was below par in 2011
The UK slowed particularly sharply because of:
■ Relatively larger fiscal tightening (change in structural deficit
was 1.7% of GDP vs 0.6% in the US and nearly 1% in
Germany)
■ Monetary policy tighter than appropriate
■ Higher inflation
● Partly related to fiscal policy with VAT hike
● Partly accounted for by weakness of sterling
■ Large exposure to the Eurozone
UK highly exposed to neighbours’ woes
Exports to the Eurozone
% of total exports (2010)
UK
50.3
Central & Eastern Europe
48.6
Germany
43.0
China
14.8
India
14.5
US
13.9
Latin America
10.4
Emerging Asia
9.2
Source: IMF Direction of Trade
2012 will be another difficult year
 Ongoing – in some cases deepening – fiscal austerity
 Credit conditions remain very tight, particularly in the Eurozone:
■ Eurozone banks facing liquidity squeeze
■ Ill-timed requirement to raise capital ratios
 Eurozone likely to be in recession in 2012H1
 But the news isn’t all bad
■ US data has been much better recently, particularly in the
labour market
■ Emergers have plenty of room to loosen policy
Further fiscal tightening to come
Advanced Economies: Fiscal tightening
Change in cyclically-adjusted balance, % of GDP
2.0
1.8
UK
US
1.6
Germany
1.4
France
1.2
1.0
Tightening
0.8
0.6
0.4
0.2
0.0
2011
Source : IMF
2012
2013
2014
2012 will be another difficult year
 Ongoing – in some cases deepening – fiscal austerity
 Credit conditions remain very tight, particularly in the Eurozone:
■ Eurozone banks facing liquidity squeeze
■ Ill-timed requirement to raise capital ratios
 Eurozone likely to be in recession in 2012H1
 But the news isn’t all bad
■ US data has been much better recently, particularly in the
labour market
■ Emergers have plenty of room to loosen policy
UK will struggle in short term…
Domestic economy is unlikely to be able to offset the external
weakness in the short-term:
 Business confidence will remain fragile while the Eurozone
crisis remains unresolved, so companies will be wary of
investing and recruiting
 Further job cuts are in the pipeline in both public and private
sectors. Unemployment is likely to rise to 9% by end-2012
 UK credit conditions could tighten, and the cost of credit could
increase, if the Eurozone crisis escalates
 The UK has more deleveraging still to do, particularly in the
household sector
Unemployment set to flirt with 3 million
UK: Unemployment
%
11
Forecast
10
9
8
7
ILO
6
5
4
Claimant count
3
2
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Oxford Economics
UK will struggle in short-term…
Domestic economy is unlikely to be able to offset the external
weakness in the short-term:
 Business confidence will remain fragile while the Eurozone
crisis remains unresolved, so companies will be wary of
investing and recruiting
 Further job cuts are in the pipeline in both public and private
sectors. Unemployment is likely to rise to 9% by end-2012
 UK credit conditions could tighten, and the cost of credit could
increase, if the Eurozone crisis escalates
 The UK has more deleveraging still to do, particularly in the
household sector
…but further out prospects are better
More favourable factors should begin to outweigh the short-term
constraints, allowing recovery to take hold from 2012H2:
 Inflation is set to fall back below 2% by early autumn, raising
consumer purchasing power
 UK businesses are in good financial shape and have the
resources to support the recovery
 Monetary policy may well become more supportive, with rates
at 0.5% until late-2013 and more QE in February
Household finances will strengthen through 2012
UK: Inflation and wages
% year
6
Forecast
5
Average
earnings
4
3
2
CPI inflation
1
0
2001
2003
2005
2007
Source : Haver Analytics/ Oxford Economics
2009
2011
2013
…but further out prospects are better
More favourable factors should begin to outweigh the short-term
constraints, allowing recovery to take hold from 2012H2:
 Inflation is set to fall back below 2% by early autumn, raising
consumer purchasing power
 UK businesses are in good financial shape and have the
resources to support the recovery
 Monetary policy may well become more supportive, with rates
at 0.5% until late-2013 and more QE in February
UK corporate position remains strong
UK: Company profits
UK: Corporate sector financial balance
% of GDP
23.5
% of GDP, 4QMA
8
23.0
6
Non-financial
corporations
22.5
4
22.0
2
21.5
21.0
Average since 2000
20.5
0
-2
Financial
corporations
20.0
19.5
19.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source : Haver Analytics
-4
-6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source : Haver Analytics
…but further out prospects are better
More favourable factors should begin to outweigh the short-term
constraints, allowing recovery to take hold from 2012H2:
 Inflation is set to fall back below 2% by early autumn, raising
consumer purchasing power
 UK businesses are in good financial shape and have the
resources to support the recovery
 Monetary policy may well become more supportive, with rates
at 0.5% until late-2013 and more QE in February
Monetary policy should remain supportive
Advanced Economies: Quantitative Easing
% of GDP
25
2009
2010
2011
2012
20
15
10
5
0
UK
US
Source : Oxford Economics/Haver Analytics
Eurozone
OBR short-term forecast looks a little strong
UK: Comparison of GDP forecasts
% year
3.5
Oxford Economics (Jan)
3.0
OBR (Nov)
HMT consensus (Jan)
2.5
2.0
1.5
1.0
0.5
0.0
2010
2011
2012
2013
Source : Oxford Economics, OBR, HMT
2014
2015
2016
The medium-term outlook
There is conflicting evidence on the degree of spare capacity in
the economy. We place greater emphasis on the labour market
data, which suggests an output gap of more than 3% of GDP
Potential output growth will be hampered by:
 Legacy of financial crisis – tighter credit conditions, slower
growth in financial services output
 Higher NAIRU – large increase in the number of long-term
unemployed, skills & regional mismatches
 Weaker in-migration flows due to poorer employment
prospects
 Weak short-term recovery in business investment – the
strength of the recovery in business investment is the key
difference compared with the OBR forecast
Output gap remains large
UK: Output gap
% of potential output
6
4
2
0
-2
-4
-6
-8
1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source : Oxford Economics
The medium-term outlook
There is conflicting evidence on the degree of spare capacity in
the economy. We place greater emphasis on the labour market
data, which suggests an output gap of more than 3% of GDP
Potential output growth will be hampered by:
 Legacy of financial crisis – tighter credit conditions, slower
growth in financial services output
 Higher NAIRU – large increase in the number of long-term
unemployed, skills & regional mismatches
 Weaker in-migration flows due to poorer employment
prospects
 Weak short-term recovery in business investment – the
strength of the recovery in business investment is the key
difference compared with the OBR forecast
GDP – a long-term view
UK: GDP
Ln(GDP)
14.5
Actual GDP
Trend GDP
14.0
13.5
13.0
12.5
12.0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Source : Oxford Economics/Haver Analytics
Risks for the UK
 Greatest downside risk especially in the short term is that
Eurozone crisis deteriorates. We have looked at a range of
outcomes and the one below assumes five counties leave the
Euro area in the coming months.
 There remains a good deal of uncertainty about both potential
growth and the amount of spare capacity in the UK economy.
It would be wise for the government not to become too
constrained on this issue and leave plenty of room for
manoeuvre when judging the fiscal stance. With better
performance and appropriate policy its possible that UK
growth could be better than expected over the medium term.
UK GDP growth under different scenarios
UK: GDP forecasts under different scenarios
% year
6
Forecast
4
2
0
-2
Baseline
-4
Eurozone break-up
-6
Stronger potential output
-8
2000
2002
2004
Source : Oxford Economics
2006
2008
2010
2012
2014
2016
Summary
 2011 was a disappointing year for the global economy, due to policy
tightening, high commodity prices and an escalation of the Eurozone
sovereign debt crisis.
 The short-term outlook is challenging, particularly for the UK, which
is highly exposed to the Eurozone crisis. Looser monetary policy
could well be necessary to offset fiscal tightening and the recession
in Eurozone.
 …but UK prospects should improve through the year, with inflation
coming down
 In the short term risks remain skewed to the downside. A Eurozone
collapse has the potential to cause a deep recession in UK
 Potential output growth may be weak in the short term, so the
medium-term recovery could be slower than in previous cycles. But
important that government allow for possibility that potential output
growth will be much stronger than many expect.