Transcript Slide 1

ACE
Sheffield
25 April 2012
The UK Economy and the next five years
Roger Martin-Fagg
Behavioural Economist
1
We need 7% growth in Broad money for normal growth
7
2010
a : broad money is the liabilities of UK banks and building societies
b : nominal GDP is what flows out of our economic pipe, it is adjusted for inflation
to determine real growth
UK Broad money and bank credit:
Banks are destroying money
7% Required for
normal growth
Household debt relative to income:
Retail will continue to struggle until the UK gets back to 110
Sources: ECB, Thomson Reuters Datastream and Bank calculations.
(a)Households’ gross debt as a percentage of a four-quarter moving sum of their disposable income.
5
UK Retail Sales are broadly flat
In final three months of 2011, volume up 1.4%, value up 5.4%
6
UK Household income gearing:
interest rates will be 0.5% until 2015
Sources: ECB, ONS and Bank calculations.
Income gearing is measured as household interest payments as a percentage of disposable income.
The UK Outlook
Non-discretionary spending is now 67.3% of household disposable income ( in 2001 it was 56.6%)
The average mortgage rate is 3.43%. 18% of household disposable income is used to finance their
mortgage (22% in 2008)
Household spending is 60% of GDP. Last year it contracted by 1.7%. This year is no better.
Unless oil and food prices fall by 20% or wages rise 7% each year over the next two years, the UK will
go into recession this Quarter and then stagnate with GDP growing less than 1% pa for the next 4
years.
Interest rates will remain at 0.5% for at least another 3 years.
10
Which sectors in the UK will grow more strongly over the next 5 years ?
Export facing manufacturing eg motor vehicles, oil industry equipment, high design content bespoke equipment
regardless of sector.
Medical technology and pharma
Distinctive, niche fashion not necessarily high end
New media, gaming, music and drama
Poundland
The underperformers
Financial services
Mass undifferentiated retail including eating out
New build Construction but not repair and maintenance
M&S
11
Economic growth and the Real Price of Oil
120
12
From 2012 onwards floor price $100
Real Price of Oil
End of Iranian
hostage crisis
Iranian
revolution
OPEC cuts
production
100
World real economic
growth
Forecast 10
80
8
Average growth
rate in real GDP,
1970-2004: 3.7%
OPEC
cartel
collapses
60
Invasion
of Kuwait
6
Start of second
war in Iraq
40
Stagflation
Growth
Boom
R
E
C
E
S
S
I
O
n
2
Growth
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: International Monetary Fund
Percent %
20
Constant US$
per barrel
4
R
E
C
E
S
S
I
O
n
Eurozone growth in Bank Lending : the October ‘rescue’ plan will reduce this to -2% over the next
two years. Probability of a recession? 100%
Source:ECB
In the EU the rate of growth in retail sales has been declining at
1.5% per annum since 2008
14
Credit growth is driving the US recovery
Conclusions:rest of world
China will slow to 7% growth from the current 9.8%, as the property market bubble bursts and
export volumes grow more slowly
Brazil is slowing rapidly as their domestic credit boom ends and bad debt increases. Next year they will
only grow by 2% and in 2013 they will only just avoid outright recession ( due to the European recession
and Chinese slow down)
India will deliver 7% each year year driven by domestic demand and continued outsourcing of
services by the West
The Global GDP growth rate will drop from 4.5% to 2% in 2012, and 1.5% in 2013. So not as bad as
2009-10, but still very challenging.
The good news is companies have lots of cash: all you need to do is give them a compelling reason to
spend it with you!
Europe will shrink by 1.5% in 2012 and by 2.8% in 2013, the contraction will be greater in the
periphery than core.
Greece will default and leave the Euro, some French and German banks will be rescued by
Government.
By the end of 2013 it will be
agreed that the Euro in its current form cannot survive ( Italy and Spain need a devaluation).
The USA will at best grow by 1.8% in 2012, with a 50% chance of recession in 2013
The UK will contract by 1% in 2012, and grow by less than 1% in 2013
There will be a severe credit crunch in Eastern Europe with a sharp increase in the number of
insolvencies, even Poland will come close to recession, whilst Hungary will contract by 5%
Russia will slow in 2012 as the price of oil falls towards $100 and stays there for
2 years. This will weaken the rouble by 10% and increase political tensions as
GDP growth slows to 2%
Key Points
The UK is experiencing a once in a lifetime discontinuity, not the normal economic cycle
Over-indebted households will continue to pay down debt for another 5 years
All the traditional consumer demand forecasting models are hopeless, bin them, this is not
like the past : repeating the old business model will not work
There is very little Government can do except keep interest rates as low as possible
Sales growth greater than 3% pa will require an increase
in market share unless exporting.
Innovate or die