Transcript Slide 1
Presentation to Recruitment International’s FD Forum UK economic outlook James Wellesley Wesley 12 September 2012 UK ECONOMY IN 2012 Things feel OK despite › Marginal recession: UK GDP likely to contract 0.7 to 1% in 2012 › Barely recovered from low point of mid 2009 Why OK? › Huge influx of foreign wealth - Obvious problems of others - Rule of law, civilised, London › Recession impact falling disproportionately on unskilled poor and public sector › The impact of Government cuts has yet to be really felt › Active black economy Employment is holding up › suggests that productivity is going backwards › without growth, unemployment will certainly rise from here on UK recruitment is very patchy › Terrible/ OK/ Surprisingly good › still some candidate shortages WYVERN PARTNERS 2 1995-2007: THE GREAT MODERATION The Internet facilitated globalisation › Goods now made in the cheapest location around the world; distance is no longer an obstacle › Price/quality analysis is very transparent Monetary policy facilitated rapid credit expansion and ‘growth’ › Credit expanded beyond productive uses › Interest rates were lowered whenever needed to sustain growth (the ‘Greenspan put’) › Eurozone mispriced and misallocated credit between member states and their banks Money growth and light supervision made a splurge of bad lending inevitable › Subprime mortgages, Icelandic raiders, ‘prime brokerage ‘ to hedge funds, expanded trading volumes, asset inflations, ‘Covenant lite’ loans The apparent result in the Western world: › Lower costs for consumers › Huge expansion of wealth of ‘owners’; increased living standards of ‘poor ‘; much wider gap between rich and poor › Virtuous circle of global growth, wealth, tax receipts and Government spending, more growth WYVERN PARTNERS 3 2007 – 2008: THE END OF THE DREAM Rolling bank insolvencies showed up the enormous scale, inter connectedness and fragility of the global banking system › Banks unable to sustain internal funding as shocks arose › Sept 2008: global financial armageddon was narrowly averted Sense was that the Great Moderation was built on excessive debt in the Western world › In banks -‘too big to fail’ , too big to control, ‘too large a part’ of the UK economy › In households – average UK household debt to income over 130% › In Sovereign governments – often debt to GDP of 80% or more (and rising) Far too much opaqueness in the financial system – completely missed by reported accounts › CDOs, CDO squared, trading › Crony interrelationship between Sovereigns and national banks European Sovereign debt problem exacerbated by › Ephemeral nature of some tax revenues (City, bonuses) and difficult to vary increases in Government spending › Nationalising (now Europeanising) of liabilities of bust banks (Ireland, UK, Spain, Italy, France) WYVERN PARTNERS 4 IMPACT ON UK POST 2007 Financial contagion and uncertainty led to sharp global downturn › UK GDP down c5% 2008-9 - UK particularly exposed to Banks and heavy weight and distraction of bank nationalisations UK still 4% below 2007 GDP peak; other G7 have all recovered a bit more strongly UK economy is now largely post industrial › Devaluation of £ has had zero impact on exports since 2007 Economic uncertainty has changed attitudes to debt › UK household leverage (as % of income) has contracted by 20 percentage points since 2007 › QE monetary expansion has approximated to reduction in the ‘velocity of circulation’ of money Banks are expected to lend more while becoming smaller/better capitalised/extensively regulated /less incentivised/fined WYVERN PARTNERS 5 INTERNATIONAL POLICY MISTAKES OF LAST 5 YEARS Governments, IMF and central banks completely focussed on sustaining the solvency of the global financial system › Initially viewed as a bank liquidity issue - hence the money ‘firehoses’ of TARP, QE, Twist, LTRO etc › …rapidly widened into a bank solvency issue › …in turned widened into a Sovereign solvency issue within the Eurozone Stated hope of Government policy has been to recapture the virtuous circle ( growth/wealth/tax/asset appreciation/performing loans/bank solvency/growth) Actual Government policy in Europe has been schizophrenic: › Extraordinarily easy monetary policy (QE and low interest rates) to keep banks and Sovereigns afloat › Moderate to harsh fiscal policy (ambitious deficit reductions = austerity) to control Government debt levels - No meaningful growth agenda in Europe The creation of the Eurozone is proving to be the disastrous political and economic decision of our generation › Recent ECB actions have deferred the crisis but have not addressed the core problem WYVERN PARTNERS 6 THE EUROZONE EXACERBATOR The Euro’s existence is substantially worsening the Eurozone and global economic slowdown › Fixed terms of trade between divergent economies are dynamicly inappropriate - the exchange rate of Southern European countries is substantially above their ‘fundamental equilibrium’ levels - Euro is mid strength reflecting German strength not accommodating Southern weakness › Breakdown of trust and goodwill between peoples › Significant and rising danger of social unrest and fundamental political changes within countries › Perception of Eurozone breakdown leading to: - Balkanisation of global banks - Withdrawal of private sector capital from Southern Sovereigns and banks - Unsustainable borrowing costs for certain sovereigns Only 4 ways for this to resolve itself: › ‘Internal devaluation’ (aka austerity resulting in mass unemployment) until labour costs are reduced to relatively competitive levels › Unending fiscal redistribution from rich countries to poor countries - €1.25 - 2.4 trillion cash transfer for PIGS 2012-15 (Lombard Street Research) › Mass emigration from the poor countries › External devaluation (aka break up of the Eurozone) WYVERN PARTNERS 7 IS THE EUROZONE MEDICINE CAPABLE OF WORKING? Two issues: › Will the Southern Europeans stick with the austerity? › Will the rich countries continue to subsidise the poor for as long as it takes? Can the medicine work? WYVERN PARTNERS 8 CURRENT GLOBAL ECONOMIC OUTLOOK IS POOR Eurozone has moved into overall recession; German PMI data is deteriorating Spain’s central/regional government structure is proving disfunctional Greece remains likely to leave the Euro European banking system is largely insolvent and retrenching USA has stuttering growth, huge debt, uncertain politics and the ‘fiscal cliff’ of Jan/Feb 2013 Japan has slipped back into recession China is slowing down fast (the “8% growth” number is no longer credible) › Industrial commodity prices have deteriorated fast › Global shipping is weak Significant price inflation of global food staples is likely later this year WYVERN PARTNERS 9 CONCLUDING THOUGHTS UK › Nothing visible which suggests any UK recovery for 2013 - Government to tinker (planning, small business bank etc) but core policy is deficit control › Substantial Eurozone and global slowdown in process with serious downside risks - Continual crisis management; fixes may well string Eurozone out for a long time - Profound structural flaws remain unaddressed › Continuing household deleveraging and pressure on disposable incomes › Continuing bank contraction › 2013 UK GDP growth - Consensus view: being reduced all the time but currently positive growth expected - JWW view: -1% for 2013; materially worse if Eurozone blows up › JWW view for 2014-15: flatlining at best Impact on UK recruitment companies › Anything less than +1% GDP growth is likely to see overall contraction in recruitment GP - Recruitment GP amplifies (6X ?) any change (+ or -) from +1% GDP growth - If 2012 GDP growth is -1% then UK recruitment GP likely to be -12% (and same again in 2013) WYVERN PARTNERS 10 DISCLAIMER The information presented herein (the Information) is based on sources which Wyvern Partners Limited (“Wyvern Partners”) regards as dependable and reliable. 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