Global & UK Macroeconomic
Outlook
John Walker
jwalker@oxfordeconomics.com
6th February 2013
World forecast
Summary of International Forecasts
Real GDP
North America
United States
Canada
Europe
Eurozone
Germany
France
Italy
EU27
Asia
Japan
China
India
World
2011
2012
2013
2014
2015
2016
2017
1.8
2.6
2.3
2.0
2.3
1.7
3.1
2.9
3.3
2.8
2.9
2.6
2.8
2.6
1.5
3.1
1.7
0.6
1.6
-0.5
0.9
0.0
-2.1
-0.3
-0.2
0.7
0.0
-1.2
0.1
1.1
1.9
1.1
0.3
1.4
1.4
1.7
1.2
1.1
1.8
1.5
1.6
1.3
1.2
1.8
1.6
1.4
1.4
1.3
1.9
-0.5
9.3
7.5
2.0
7.7
5.4
0.5
8.3
6.0
1.7
9.0
7.5
2.1
8.5
7.9
1.2
8.0
7.8
1.6
7.7
7.7
2.9
2.3
2.4
3.4
3.7
3.5
3.5
In mid 2012, risks were skewed to the downside..
 US fiscal cliff (10%)
■ Stalemate in the House implies much
larger fiscal tightening than in baseline
■ Business and consumer confidence
negatively affected
■ Additional QE and weaker US$ to
provide only partial offsets
■ Trade and financial linkages cause
global slowdown
Oxford Forecast (45%)
■ Eurozone avoids breakup. ECB and
governments take significant steps to
ensure Eurozone survival
■ Risk premia fall, and consumer and
business confidence gradually recover.
■ Recovery limited by high debt, weak
job growth and fiscal retrenchment
■ EMs robust as policy eases and
growing middle class support
consumer spending and trade
 Multiple Eurozone exits (30%)
■ Fiscal austerity in Greece becomes
unbearable; government falls and defaults
■ Financial contagion spreads
■ Run on banks in peripherals leading to
credit crunch,
■ Cyprus, Portugal, Spain, Italy & Ireland
also forced out of Eurozone.
 China hard landing (15%)
■ Commercial property crash & external
weakness leads to banking sector
stress
■ Flight from risk leads to falling share &
property prices
■ Investment slumps in China as
government recapitalises banks
■ Asian supply chain affected as domestic
engine of growth stalls
…but now the risks are much more balanced
 Middle East tensions (5%)
■ Political tensions escalate in Egypt,
Syria and Iran
■ Concerns about stability in the region
push oil prices to over $200/barrel
■ Business and consumer confidence hit
by energy shock
■ Political situation stabilises gradually.
Oil prices return to baseline by 2015.
Oxford Forecast (60%)
■ Steps to ensure Eurozone survival are
taken, although they are not enough to
kick start significant growth.
■ Risk premia fall, and consumer and
business confidence gradually recover.
■ Recovery limited by public and private
deleveraging and weak job growth
■ EMs robust as policy eases and
growing middle class support
consumer spending and trade
 Eurozone exits in 2014 (15%)
■ Fiscal austerity in peripheral countries
becomes unbearable
■ No growth pushes unemployment yet
higher. Pro-exit parties gain popularity.
■ No real progress on banking and fiscal
union,
■ 6 countries exit Eurozone in 2014 Q1.
 Faster upturns in US & EMs (15%)
■ Resolution of outstanding fiscal issues
encourages investment and hiring in the
US.
■ Momentum in EMs builds as trade picks
up and accommodating policy feeds
through
■ Business and consumer confidence rise
as conditions improve.
UK vs US – GDP growth
GDP growth
% year
6
4
Forecast
UK
US
2
0
-2
-4
-6
-8
2000
2002
2004
2006
2008
2010
Source : Oxford Economics/ Haver Analytics
2012
2014
2016
As expected, 2012 was a difficult year…
UK: GDP
% year
4
GDP outturn
3
Jan12 fcst
2
1
0.3
0
0.0
-1
-2
-3
-4
-5
2005 2006 2007 2008 2009 2010 2011 2012
Source : Oxford Economics
…mainly due to poor export performance
UK: Contributions to GDP growth (2012)
%pts
0.8
Business
0.6
0.4
0.2
0.0
-0.2
-0.4
Govt
-0.6
Residential
-0.8
-1.0
Consumer
spending
Investment
Govt.
Inventories
consumption
Source : Oxford Economics/Haver Analytics
Net trade
Little momentum heading into 2013
UK: Purchasing managers' surveys
% balance*
65
60
Services business
activity
55
50
45
Manufacturing
activity
40
35
*value over 50 indicates
rising activity
30
2005
2006
2007
Source : CIPS/Markit
2008
2009
2010
2011
2012
2013
Predictions for the UK economy in 2013
 Exports to do be better in 2013
UK vs US – Exports
Export volume growth
% year
20
Forecast
15
US
10
5
0
-5
UK
-10
-15
-20
2000
2002
2004
2006
2008
2010
Source : Oxford Economics/ Haver Analytics
2012
2014
2016
Eurozone weakness will constrain export pickup
UK: World trade and exports
% year
15
World trade
Forecast
Exports
10
5
0
-5
-10
-15
2000
2002
2004
2006
2008
Source : Oxford Economics/Haver Analytics
2010
2012
2014
2016
Predictions for the UK economy in 2013
 Exports to do be better in 2013
 Inflation will eventually move back to target….but not until the
latter part of the year
Inflation remained stubbornly high in 2012H2
UK: Contributions to CPI inflation
% year
6
Transport
5
4
Housing
costs
Other
3
`
2
1
Food
0
2005
2006
2007
2008
2009
Source : Oxford Economics/Haver Analytics
2010
2011
2012
Stable oil prices should help reduce inflation…
World: Oil price
$ per barrel
130
F'cast
120
110
100
90
80
UK: Unleaded petrol prices
70
pence per litre
60
150
F'cast
50
40
2005
140
2006
2007
2008
2009
2010
Source : Oxford Economics/Haver Analytics
2011
2012
2013
130
120
110
100
90
80
70
2005 2006
2007
2008
2009 2010
Source : Oxford Economics/Haver Analytics
2011 2012
2013
…but will initially be offset by food and utilities…
UK: Food prices
UK: Domestic energy prices
% year
% year
12
F'cast
60
F'cast
Gas
50
10
40
8
30
6
20
10
4
Electricity
0
2
0
2005
-10
2006
2007
2008
2009
2010
Source : Oxford Economics/Haver Analytics
2011
2012
2013
-20
2005
2006
2007
2008
2009
2010
Source : Oxford Economics/Haver Analytics
2011
2012
2013
…so it will be end-13 before CPI is back at 2%
UK: Inflation relative to target
% year
5
Forecast
4
3
2% target
2
1
CPI inflation
0
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Oxford Economics
Predictions for the UK economy in 2013
 Exports will do better in 2013
 Inflation will eventually move back to target….but not until the
latter part of the year
 Consumer spending to grow modestly again this year
Real incomes held up surprisingly well in 2012
UK: Real wages
UK: Real personal disposable income
% year
6
% year
CPI inflation
3.0
2.5
5
2.0
4
1.5
1.0
3
0.5
2
0.0
Earnings
(regular pay)
1
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source : Haver Analytics
-0.5
-1.0
-1.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source : Oxford Economics/Haver Analytics
A sharp rise in employment, plus generous uprating of state benefits more
than offset the impact of below-inflation earnings growth
Consumers are still looking to deleverage
UK: Household debt-to-income ratio
% of household disposable income
180
Forecast
170
160
150
140
130
120
110
100
1990
1995
2000
2005
Source : Oxford Economics/Haver Analytics
2010
2015
Predictions for the UK economy in 2013
 Exports will do better in 2013
 Inflation will eventually move back to target….but not until the
latter part of the year
 Consumer spending to grow modestly again this year
 Housing market activity will increase, partly due to FLS. But
prices will continue to drift downwards
Banks are bullish about mortgage availability…
UK: Mortgage availability
% balance : loosening (+) / tightening (-)
40 *The single datapoints represent 3 month
forecasts, while the columns represent actual data
30
20
10
0
-10
-20
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2010
2011
Source : Bank of England Credit Conditions Survey
2012
2013
…but impact on lending has been small so far…
UK: Housing market activity
£bn
12
10
Number of loans approved
for house purchase
(RHS)
000s
140
120
8
100
6
80
4
60
Net mortgage
lending (LHS)
2
0
40
20
-2
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: Haver Analytics
0
UK vs US – Value added in construction
GVA in construction
% year
Forecast
15
10
5
0
-5
US
UK
-10
-15
-20
2000
2002
2004
2006
2008
Source : Oxford Economics/Haver Analytics
2010
2012
2014
2016
Predictions for the UK economy in 2013
 Exports will do better in 2013
 Inflation will eventually move back to target….but not until the
latter part of the year
 Consumer spending to grow modestly again this year
 Housing market activity will increase, partly due to FLS. But
prices will continue to drift downwards
 Firms will remain reluctant to commit funds to investment
because of on-going uncertainty around the outlook
Firms are still awash with cash…
UK: PNFC financial balance
% of GDP, 4QMA
5
4
3
2
1
0
-1
-2
2000
2002
Source : Haver Analytics
2004
2006
2008
2010
2012
…but remain reluctant to spend…
UK:BoE agents' survey: Investment intentions
% balance
4
Services
3
2
1
0
-1
-2
Manufacturing
-3
-4
-5
2000
2002
2004
Source : Haver Analytics
2006
2008
2010
2012
…and investment is likely to continue to lag
UK: Business investment across cycles
Rebased, cyclical peak = 100
120
115
1979Q3
110
105
100
1989Q3
95
90
85
80
2007Q4
75
70
0
2
4
6
Source : Oxford Economics
8
10
12
14
16
18 20 22 24
Quarters from peak
Predictions for the UK economy in 2013
 Exports will do better in 2013
 Inflation will eventually move back to target….but not until the
latter part of the year
 Consumer spending to grow modestly again this year
 Housing market activity will increase, partly due to FLS. But
prices will continue to drift downwards
 Firms will remain reluctant to commit funds to investment
because of on-going uncertainty around the outlook
 The Chancellor will continue to follow ‘Plan A’ despite further
weak growth and failing to achieve OBR’s fiscal forecasts
UK vs US – Fiscal tightening
Fiscal tightening*
% of potential GDP
3
*positive value indicates fiscal tightening
1.9
2
1.2
0.8
1
1.2 1.1
0
-1
-0.3
-0.5 -0.6
-2
-2.0
-2.2
-3
UK
US
-2.5
-2.9
-4
2007
Source : IMF
2008
2009
2010
2011
2012
UK vs US – Government deficit
Government deficit
% of GDP
4
Forecast
2
0
-2
UK
-4
-6
US
-8
-10
-12
-14
2000
2002
2004
2006
2008
2010
Source : Oxford Economics/ Haver Analytics
2012
2014
2016
Boost to capital spending was too timid
UK: GDP
% year
3.0
Baseline
Scenario
2.6
2.5
2.1
2.5
2.2
2.0
1.5
1.5
1.0
1.0
0.5
0.0
Baseline includes
£5bn of extra
capital spending
between 2013-15,
paid for by deeper
current spending
cuts
0.0
0.0
2012
Source : Oxford Economics
2013
2014
2015
Scenario shows
impact of £10bn of
additional capital
spending in both
2013/14 and
2014/15, paid for
through additional
borrowing
Predictions for the UK economy in 2013
 Exports will do better in 2013
 Inflation will eventually move back to target….but not until the
latter part of the year
 Consumer spending to grow modestly again this year
 Housing market activity will increase, partly due to FLS. But
prices will continue to drift downwards
 Firms will remain reluctant to commit funds to investment
because of on-going uncertainty around the outlook
 The Chancellor will continue to follow ‘Plan A’ despite further
weak growth and failing to achieve OBR’s fiscal forecasts
 The MPC appears to have lost faith in QE and looks likely to
sit on its hands…at least until the change of Governor
Growth will struggle to get above 1% in 2013
UK: Contributions to GDP growth
%pts
Consumer spending
Govt. consumption
Net trade
4.0
3.5
3.0
Investment
Inventories
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
19972007
2010
Source : Oxford Economics
2011
2012
2013
2014
2015
UK forecast
Forecast for UK
(Annual percentage changes unless specified)
Domestic Demand
Private Consumption
Fixed Investment
Stockbuilding (% of GDP)
Government Consumption
Exports of Goods and Services
Imports of Goods and Services
GDP
Industrial Production
CPI
Current Balance (% of GDP)
Short-Term Interest Rates (%)
Long-Term Interest Rates (%)
Exchange Rate (vs US$)
Exchange Rate (Euro per £)
Output gap (% of potential GDP)
2011
2012
2013
2014
2015
2016
2017
-0.6
-1.3
-2.9
0.4
-0.1
4.5
0.5
0.9
-0.8
4.5
-1.3
0.9
3.1
1.60
1.15
-2.9
1.0
0.9
0.0
0.1
2.8
-0.4
2.3
0.0
-2.4
2.8
-3.6
0.8
1.9
1.59
1.23
-5.0
1.3
1.2
2.8
0.3
-0.3
2.1
3.0
1.0
-1.0
2.4
-3.3
0.5
2.1
1.58
1.24
-5.4
1.8
2.0
5.6
0.3
-1.4
4.8
3.8
2.1
1.2
1.6
-3.1
0.5
2.4
1.53
1.27
-5.2
2.1
2.4
5.6
0.3
-1.3
4.9
3.7
2.5
1.1
1.5
-2.9
0.5
2.6
1.53
1.31
-4.6
2.3
2.8
5.8
0.3
-1.6
5.4
4.0
2.8
1.3
1.6
-2.4
0.7
3.0
1.54
1.31
-4.0
2.4
3.0
5.8
0.3
-2.2
5.6
4.0
2.9
1.4
1.7
-1.9
1.6
3.6
1.54
1.32
-3.2
Flat GDP and strong employment growth…
UK: Labour market
Employment (000s)
29.8
Unemployment (000s)
2.9
29.7
2.7
Unemployment
(RHS)
29.6
29.5
2.5
29.4
29.3
2.3
29.2
2.1
29.1
1.9
29.0
28.9
Employment
(LHS)
28.8
28.7
2008
1.7
1.5
2009
Source : Haver Analytics
2010
2011
2012
…have left us with a productivity puzzle
UK: GDP and employment growth (5yr MA)
UK: Output per worker
GDP growth, % year
5
2009=100
120
Employment growth, % year
2.75
Employment growth
(RHS)
115
4
Pre-recession
trend
110
3
0.75
14%
105
100
2
Actual
95
1
GDP growth
(LHS)
-1.25
90
85
0
80
-1
1975
-3.25
1980
1985
1990
1995
Source : Haver Analytics / Oxford Economics
2000
2005
2010
75
1995 1997 1999 2001 2003 2005 2007 2009 2011
Source : Haver Analytics
Why could productivity have been so weak?
 Factor substitution – preference of labour for capital?
 Not large – little substitutability between labour and capital in most
industries
 Labour hoarding, made possible by low earnings growth?
 Maybe at the start of the recession, but why would firms be taking
new staff on now?
 Zombie companies tying up capital and employing staff?
 Again may contribute to some labour hoarding but can’t explain new
jobs
 Given the above and comparing UK with other countries
suggest that there may well be some under-reporting of GDP
 Deflators are probably too high, particularly for services activity
Is the drop in UK productivity plausible?
UK: Output per worker across countries
Index, 2008Q1 = 100
110
UK
108
Germany
106
US
France
104
102
100
98
96
94
92
90
2008
2009
Source : Haver Analytics
2010
2011
2012
Why has the UK recovery been so weak?
Decomposing UK GDP in 2012
per cent
Degree to which GDP is below the long-term trend
14
Impact of the financial crisis on potential output
Impact on capital stock
Impact on growth in the labour supply
Impact on total factor productivity
1
0
3-5
Under recording of the current level of GDP
3
Spare capacity
5-7
Why are we below capacity?
Fiscal tightening
Tight credit conditions
Weak Eurozone demand
Slow adjustment
3
1
1
1-2
Note: Figures may not sum due to rounding
Source: Oxford Economics
Thank you
The UK deflators look high
GDP deflator
2008Q1 = 100
112
110
UK - basic prices
UK - market prices
108
US - market prices
106
104
102
100
98
2008
2009
Source : Haver Analytics
2010
2011
2012
UK vs US – Wage inflation
Wage inflation
% year
8
Forecast
7
6
5
US
4
3
2
UK
1
0
-1
-2
2000
2002
2004
2006
2008
2010
Source : Oxford Economics/ Haver Analytics
2012
2014
2016