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UK economic
prospects
KPMG’s Economy Watch
Bill Robinson
Tuesday November 29th 2011
Overview
Global economic background
The Eurozone crisis
Prospects for the UK
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
1
Overview
Global economic background
The Eurozone crisis
Prospects for the UK
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
2
The banking crisis of 2008..
13 September
17 February
7 March
17 March
22 April
25 June
13 July
7 September
15 September
16 September
17 September
21 September
25 September
29 September
29 September
29 September
13 October
2007
2008
2008
2008
bank run on Northern Rock
Northern Rock nationalised
US Federal Reserve makes $200bn of funds available to banks
JP Morgan Chase takes over Bear Stearns
RBS writes off £6bn and seeks £12bn rights issue
Qatar Investment Authority gives Barclays £1.7bn
US mortgage lender IndyMac collapses
US government rescues Fannie Mae and Freddie Mac
Lehman Brothers files for Chapter 11 bankruptcy protection
US government rescues AIG ($85bn)
Lloyds TSB buys HBOS for £12bn
Goldman Sachs and Morgan Stanley change status
US mortgage giant Washington Mutual fails
US House of Representatives votes NO to the bail-out plan
Bradford & Bingley nationalised
Wachovia, Glitnir, Landesbank, Kaupthing
UK bail out plan: government takes stake in RBS and Lloyds TSB
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3
..led to a collapse in bank
lending (% yoy)
Source: Thomson Datastream
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
4
.. and a sharp slowdown in
monetary growth, which is
Bank Lending to Private Sector (1992 = 100)
500
Index
France
400
Euroland
300
Germany
Japan
200
US
100
UK
0
Jan 92 Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10
Source: Thomson Datastream
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
5
..likely to remain subdued for
some years
• Regulatory response to banking crisis (Basle III) is all about
increasing banks’ capital adequacy ratios
•This means less lending for a given stock of equity capital
•Yet impairments continue to erode equity capital base
•When interest rates rise, more loans will become impaired
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6
Crisis also led to largest fall in
global GDP since World War II
World real output growth
8
First negative
annual growth
rate
7
6
% growth
5
4
3
2
Internet bust
Yom Kippur
1
Gulf war
Fall of Shah
0
-1 1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
Source: IMF
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
7
..stemmed by the G20 London
Summit in March 2009..
Industrial Production (Jan-07 – 100)
110
105
G20
London
summit
100
USA
UK
95
France
Italy
90
Spain
Germany
85
80
75
70
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Source: Thomson Datastream
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
8
… which paved the way for
Quantitative Easing …
8000
3100
7000
2900
6000
2700
5000
2500
4000
2300
Assets
Purchased
3000
2000
FTSE All
Share
1000
0
Jan 09
2100
FTSE All Share
Weekly Assets Purchased (£bn)
Quantitative Easing and the FTSE All Share
1900
1700
1500
May 09
Sep 09
Jan 10
May 10
Source: Thomson Datastream
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
9
..which boosted stock markets..
Stock Indices (Jan 2003 = 100)
400
UK
300
Index
France
Germany
200
UK
Spain
100
US
0
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
Jan 09
Jan 10
Jan 11
Source: Thomson Datastream
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
10
..put a floor under house prices..
Nominal House Prices (Jan 2000 = 100)
Index
250
200
150
100
USA
UK
50
0
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Source: Thomson Datastream
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
11
..and led to a renewed upswing
in commodity prices…
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12
..including oil prices
Oil Prices 1970-2011
Price per barrel (US Dollar)
120
Fall of
Shah
100
$ money of the day
(i.e. prices as of year
listed)
$ 2009 (i.e. 2009
prices)
80
60
Yom
Kippur
war
Real Prices (2009 USD)
Gulf
war
40
Dotcom
boom
Banking
crisis
20
Nominal Prices
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: BP Statistical Review of Energy, 2010
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13
..leading to a resumption of
global growth in 2010..
(%)
2009
2010
2011 (f)
2012 (f)
US
-2.6
3.0
1.8
2.4
Japan
-5.2
4.0
-0.7
3.1
Eurozone
-4.0
1.7
1.9
1.5
Asia ex
Japan
5.6
9.0
8.3
8.2
China
9.4
10.1
9.1
9.5
Latin
America
-1.7
6.0
4.5
4.2
Source: Consensus Forecasts/Goldman Sachs
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14
..much stronger in Asia and
the Americas than in Europe
Source: IMF
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
15
Overview
Global economic background
The Eurozone crisis
Prospects for the UK
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
16
Worrying because the Eurozone
is a large global player..
Nominal GDP (current USD)
UPDATE
12,168
26,684
Euro area
4,075
European Union - Euro
exclu.
Japan
5,459
United States
Rest of the World
14,527
Source: IMF WEO
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
17
.. and an important destination
for UK exports
Top 10 Destinations for UK Exports, 2010
Sweden
China
Italy
Spain
Belgium
Irish Republic
France
Netherlands
which country
matters most to
the UK: China or
Belgium?
Germany
United States
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000
0
2010 £ Millions
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18
Growth prospects remain poor
in the Eurozone periphery
(%)
2008
2009
2010
2011 (f)
2012 (f)
Germany
1.0
-4.7
3.6
3.4
1.9
France
0.1
-2.5
1.4
1.9
1.7
Italy
-1.3
-5.2
1.2
0.8
0.8
Spain
0.9
-3.7
-0.1
0.7
1.1
Greece
1.0
-2.0
-4.4
-4.0
-0.5
Ireland
-3.5
-7.6
-0.4
0.3
1.3
Portugal
0.0
-2.5
1.3
-2.0
-2.0
Eurozone
0.3
-4.1
1.7
1.9
1.5
E Europe
4.2
-5.2
4.3
4.4
4.2
Source: Consensus Forecasts
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19
..which means that the global
public debt problem..
Source: Bank of England
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20
.. is particularly bad for the PIIGS
Budget surplus/deficit
5
Surplus (Deficit), % of GDP
0
-5
2007
-10
2008
Greece
G
2009
r
2010
eG
r
2011
e
ce
ee
c
e
-15
-20
-25
-30
-35
Source: IMF
*2010 & 2011 figures are estimates
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21
..which has worried markets
since the banking crisis broke
Source: Datastream
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
22
Greek sovereign debt is held
by banks around Europe..
European banks exposure to Greek sovereign debt (Euros million)
Greece
UPDATE
France
Germany
Cyprus
Belgium
United Kingdom
Italy
Portugal
Netherlands
Austria
Spain
0
20,000
40,000
60,000
80,000
100,000
120,000
Source: European Banking Authority
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23
..and exposure to PIGS Debt* is
even greater
UK- $341bn
Others- $668.8bn
Germany- $514.2bn
France- $399.8bn
* Sovereign debt of Greece, Portugal, Ireland, and Spain (2009)
Source: BIS
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24
PIIGS also have large deficits
on their balance of payments
Current Account Deficit (% GDP)*
% GDP
10
UPDATE
5
2007
2008
0
2009
Greece
-5
2010
-10
-15
Germany
Greece
Ireland
Italy
Japan
Portugal
Spain
United
Kingdom
United
States
Source: IMF
*2010 figures are IMF estimates
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
25
.. a consequence of joining
the Euro…
Loss of competitiveness against Germany (based on consumer prices
1999 Q1 =100)
160
Germany 0
UPDATE
Index
150
Greece 28
140
130
Italy 9
120
Portugal 14
110
Spain 20
100
Ireland 18
90
Q1 1999
Q1 2001
Q1 2003
Q1 2005
Q1 2007
Q1 2009
Q1 2011
Source: Thomson Datastream
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26
(The UK has escaped this
problem)
Source: OECD
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27
Greece and Portugal are most
at risk
Source: IMF
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28
The Greek crisis
• Matters because:
• Secondary banking crisis
• Contagion
• Threatens Euro exit
• Three crises rolled into one:
“Eliminate the
impossible and
whatever
remains,
however
improbable, is
the truth”
• Debt
• Competitiveness
Sherlock
Holmes
• Political/legal
Recent developments – election or referendum – make
exit more likely
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29
The Greek crisis
Competitiveness crisis solved by devaluation, but:
•
Can Greece exit Eurozone and stay in EU?
•
Bank runs in Greece?
•
Capital controls
•
Legal entitlement of depositors in Euro
•
Litigation
Inside the Eurozone Greece is condemned to:
• Getting inflation below German levels to restore competitiveness
• Years of slow or negative growth
• Public finances remaining in deficit
• Southern Italy precedent?
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30
The crisis has caused sharp
fall in confidence in Germany ..
German ZEW Indicator of Economic Sentiment
Source: Data Stream.
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31
..a lesser fall in the Euro Area
as a whole
Euro Area Economic Sentiment Indicator
Source: Data Stream.
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32
But global equity prices have
fallen more than in 2010
Global stock markets: indices January 2003=100
300
250
200
UK (FTSE All-Share)
150
France
Germany
100
Spain
US
50
0
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33
..and the gold price has risen to
Winter of Discontent levels
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34
Overview
Global economic background
The Eurozone crisis
Prospects for the UK
© 2011 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
35
UK leading indicators are also
pointing downwards again
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36
This has been the deepest UK
recession since the War..
UK GDP - year on year growth
12%
UPDATE
9%
6%
3%
0%
-3%
-6%
-9%
Q1 1956 Q1 1962 Q1 1968 Q1 1974 Q1 1980 Q1 1986 Q1 1992 Q1 1998 Q1 2004 Q1 2010
Source: Thomson Datastream
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37
..with the slowest recovery – on
course to be worst ever.
Source: National Institute for Economic and Social Research
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38
A large output gap is not
generating a rapid rebound
UPDATE
Output gap
10%??
Output gap 9%
Source: Bank of England with illustrative KPMG calculations of output gap
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39
..reflecting hesitant output
growth in recent quarters
%
1.5
Real GDP growth
(Per cent, quarter-on-quarter)
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
00 001 002 003 004 005 006 007 008 009 010 011
2
2
2
2
2
2
2
2
2
2
2
20
Source: ONS
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40
..and renewed rise in
unemployment
000s
Unemployment claimant count
(monthly change, 000s)
Source: ONS
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
41
Unemployment is at its highest
level for 13 years
UK Unemployment Rate
12
10
%
8
6
4
2
0
Jan 80
Jan 83
Jan 86
Jan 89
Jan 92
Jan 95
Jan 98
Jan 01
Jan 04
Jan 07
Jan 10
Source: Thomson Datastream
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42
But low compared with the
recessions of 1980 and 1990
UK Unemployment Rate
12
10
%
8
6
4
2
0
Jan 80
Jan 83
Jan 86
Jan 89
Jan 92
Jan 95
Jan 98
Jan 01
Jan 04
Jan 07
Jan 10
Source: Thomson Datastream
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
43
Manufacturing industry is
especially badly hit..
Manufacturing output
(index 2000=100
Source: ONS
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44
..despite a highly competitive
exchange rate..
UK Real Effective Exchange Rate
120
Index
110
100
ERM Exit
90
80
70
60
50
Jan 75 Jan 79 Jan 83 Jan 87 Jan 91 Jan 95 Jan 99 Jan 03 Jan 07 Jan 11
Source: Bloomberg
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45
..because it is so dependent on
Europe
Top 10 Destinations for UK Exports, 2010
Sweden
China
Italy
Spain
Belgium
Irish Republic
France
Netherlands
Germany
United States
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000
0
2010 £ Millions
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
46
Recent survey showed
people worried by inflation
UK GDP and inflation (YOY % change)
6%
YOY % change
4%
2%
GDP
0%
RPI
-2%
-4%
-6%
-8%
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011
Source: Thomson Datastream
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member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom.
47
.. which has been persistently
under-estimated by the IMF..
UK - IMF Inflation forecasts (% annual change)
5.0
4.5
4.0
3.5
3.0
Apr-10
2.5
Oct-10
Apr-11
2.0
Oct-11
1.5
1.0
0.5
0.0
2009
2010
2011
2012
2013
2014
2015
2016
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48
Real incomes are squeezed as
prices rise faster than wages
125
Average Weekly Earnings Index (Jan-08 = 100)
120
Total Imports Price Index (Jan-08 = 100)
115
110
105
100
95
90
85
80
ONS seasonally adjusted Average Weekly Earnings data
ONS External Trade Statistics – Total Imports Price Index
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49
This is now worst squeeze since
the 1920s
Real Disposable Income per Head (Q1 2005 = 100)
105
Units
104
103
102
101
100
99
98
97
Q1 2005
Q1 2006
Q1 2007
Q1 2008
Q1 2009
Q1 2010
Source: Thomson Datastream
First time since 1920s that real incomes have not grown over a 6 year period
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50
Households stopped running up
debt and started paying it down
Source: Bank of England
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51
Real income squeeze forecast
to end as inflation comes down
Inflation uptick is caused by:
• Sterling’s depreciation
• Energy prices
• VAT increase
These are one-off, not ongoing, changes
Rate of inflation
Price level
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52
CBI survey evidence
suggests sales may fall
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53
..or at least suffer slower
growth (from a low base)
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And like-for-like sales have
been falling
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A rising share of spending is
taken by the utilities
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..because of the sharp rise in
fuel prices
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Glass half full?
You could argue that, given the threat to the High Street
from:
• Inflation;
• Debt;
• The banks;
• Fuel bills;
• Online purchases;
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Glass half full?
You could argue that, given the threat to the High Street
from:
• Inflation;
• Debt;
• The banks;
• Fuel bill
• Online purchases;
…..the resilience of spending is quite encouraging
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Budget 2011 forecast
% change y-o-y
2010
2011
2012
2013
GDP
1.3
1.7
2.5
2.9
Household
consumption
0.8
0.6
1.3
1.8
Gross fixed
investment
3.1
2.3
6.0
8.8
Govt consumption
1.0
0.8
-1.2
-1.8
Exports
5.8
7.9
6.5
6.2
Public borrowing £bn
146
122
101
70
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60
member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United KingdomSource:
.
HM Treasury
Conclusions
Recovery is well established, but longer-term threats will
inhibit the pace of growth:
• Banks’ ongoing reluctance to lend;
• The looming crisis in Euroland, biggest UK export market
• Households facing squeeze on real incomes and seeking
to reduce their borrowing
• Discretionary spending hit by sharp rise in price of food
and utilities
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Questions?
Bill Robinson
Head of Economics, KPMG Forensic
Mobile: 07715 704 743
Office: 0207 311 3515
Email: [email protected]
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Countries with larger deficits
have done more tightening..
UK counterfactual
Actual
Source: Budget 2011
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..because bond market vigilantes
stalk the fiscally profligate..
Source: Budget 2011
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..which has worried markets
since the banking crisis broke
Source: Datastream
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In order to achieve the required
fall in borrowing..
Source: Budget 2011
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