Transcript Interest Rates - Institute of Directors

Economy & Pensions Update
With James Sproule and Malcolm Small
Institute of Directors
Wednesday 10th September
Macro Economic Outlook
GDP – Interest Rates - Thresholds of Demand
September 2014
James Sproule, Chief Economist
Institute of Directors
[email protected]
@jamesrsproule
Contents
• Economic forecasts
• Interest Rates
• Thresholds of Demand
Addicted to debt – Hampered by
bureaucracy
UK economic forecasts remain too
calm
Economic forecasts have a strong tendency to underestimate volatility
 Consensus estimate real trend rate of UK growth to be ~2.0%
 Disaggregating consensus does not significantly raise forecast volatility
Conclusions
 Look to economists for a trend
 Any trend forecast has to stack up with expected changes that can be observed
(demographics etc.)
UK GDP
(HM Treasury consensus survey forecast)
8%
6%
4%
2%
0%
GDP
-2%
Consensus Aug 2006
-4%
Consensus Aug 2009
-6%
Consensus Aug 13
2014
2012
2010
2008
2006
2004
2002
2000
-8%
2016
Forecast
Consensus Aug 14
Source: ONS, HM Treasury Consensus
UK CPI
5.0%
4.0%
3.0%
Misc
Resturants
Education
Recreation
Coms
Transport
Health
Furniture
Housing & H Coss
Clothing
Alcohol
Food & Drink
2.0%
1.0%
0.0%
-1.0%
1999
2001
2003
2005
2007
2009
2011
2013
Source: ONS, IoD Policy Unit
UK economic forecasts
•
•
•
GDP growth looking set to rise modestly above trend (2.5%-3.0%) for next two years
•
Debt consolidation continuing, corporates and banks doing well, consumers and government debt
consolidation continues
•
Exporters used weak sterling to increase margins rather than expand market share, this
contributed to rapid corporate debt consolidation
•
UK Directors are expecting to increase staff pay modestly underpinning consumer confidence
Inflation remains subdued.
•
Pay remains very tied to firm performance
•
Housing inflation is not uniform and can be addressed by other means
UK productivity remains middling
•
•
•
•
UK productivity in line with Italy and Canada, below Germany and the US
Service sector has in recent years seen substantial rises in productivity, although public sector
continues to lag
UK workforce participation rates remain high (73%), this has the effect of lowering aggregate UK
productivity measures
IoD has called for rise in UK interest rates in autumn/winter 2014/2015
•
•
BoE has called present situation “Extraordinary Monetary Policy”, economy can now sustain
normal rate environment
Rise in rates from 0.5% necessary to allow monetary policy lever to function properly
UK Interest rates
•
Bank of England base rates are at 0.5%, the lowest in history
•
Monetary policy remains ineffective as rates are too low to allow for stimulus
UK Bank of England Base Rates
18
16
14
12
10
8
6
4
2
0
Source: BoE
UK Interest rates – cont
UK 10 Y Gilt Curve
•
Long term time value of money varies
with inflationary expectations
14
12
1990
2000
2010
2014
10
•
Bank of England sets overnight rate,
markets determine shape of the curve
from that point
8
6
4
2
0
US Credit Spreads
25
AAA
AA
•
Corporate borrowing is at a (highly
variable) premium above base rates.
•
Spreads move in response to market
sentiment and investors outlook
A
20
BBB
BB
15
B
10
5
0
2004
2006
2008
2010
2012
2014
Source: BoE, St Louis Fed Reserve, IoD Policy Unit
UK Interest outlook
• Bank of England determines base rates - a single point in a highly
complex picture.
• Inflationary expectations can be shaped by a responsible
governments and can destroy irresponsible governments.
• Investor confidence – reflecting broad risk assessments – is the key
to interest rate spreads. Spreads matter more to businesses,
particularly SME businesses than base rates.
Global opportunities abound –
But many will never see them
Stages of Economic Development
Low Cost Labour
•
•
Secure Property Rights
•
•
•
Politicians are brought fully under the law
Secure property rights allow for development of
domestic business base
Basic components& services supplied locally
GDP/Head of ~$7500
•
Business friendly government encourages Multi
National Corp (MNC) investment
MNC’s seeks to lower costs of commoditised
products and services
Intellectual capital transfer is low
MNC’s can cope with uncertainty/SME can not
GDP/Head of ~$2500
•
Intellectual Development
•
•
•
Local value added goods and services
are brought to market
Tech development in domestic market
Fading dependence on FDI, domestic
demand is increasingly sophisticated
Time to Increase GDP
Pre 1875
76
1876-1900
52
16
13
17
11
103
82
GDP from $2,500 to $5,000
GDP from $5,000 to $7,500
1901-1950
Post 1951
37
19
15
14
7
8
40
60
GDP from $7,500 to $10,000
Countries
Pre 1875 Australia, UK, Netherlands, USA
1876-1900 France, Germany, Canada, Argentina
1901-1950 Sweden, Italy, Ireland, Spain, Chile, Japan, Russia (USSR), South Africa
Post 1950 Poland, Mexico, Colombia, Singapore, Turkey, Brazil, South Korea,
Malaysia, Thailand, China
Thresholds of Demand
Air Travel
140%
120%
Credit cards
Penetration rate
100%
Radio
80%
Internet
Car
TV
60%
40%
Fix Teleco
Broadband
20%
Mobile (2012)
120%
Mobile (2007)
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
140%
GDP - US$/Head
100%
80%
60%
Mobile (2002)
40%
20%
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0%
0
Penetration rate
0
0%
GDP - US$/Head
Source: IMF, ITU, CIA, IoD Policy Unit
14,000
Development and Thresholds of
Demand
New Car
Phase I - 2010
Phase I - 2019
12,000
Credit Cards & Fix Teleco
Phase II - 2010
Phase II - 2019
GDP $/Head
10,000
Argentina
8,000
Columbia
6,000
Air Travel
China
4,000
TV & Mobile (2002)
Indonesia
Internet
2,000
Radio
India
Nigeria
Mobile (2010)
0
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
GDP CAGR
Source: IMF, IoD Policy Unit
20%
Development and Thresholds of
Demand
• A degree of reality is necessary in making assumptions about future growth.
• The world is rarely so predictable that straight line growth forecasts are a
reliable guide to much of anything.
• Sustainable economic growth naturally takes economies and societies through a
number of significant changes.
• Many vested interests will find these transitions difficult; it should not be
assumed that what is best for an economy overall will prevail.
• What economic growth means to individual businesses and industries varies,
and there are clear points of increasing demand.
• These thresholds are dynamic, but they do offer clear guidelines as to where
potential business opportunities are likely to arise.
• Over the next decade a number of significant markets, Nigeria and India to name
but two, are going to be seeing strong growth in communications and media,
while demand for air travel in China is (hopefully) set to explode.
Pensions
“Why Pensions Matter and the Policy Agenda”
September 2014
Malcolm Small
Senior Adviser, Financial Services
Policy
Institute of Directors
[email protected]
What We’ll Be Looking At:
•
•
•
•
Why Pensions Are Important
What IoD Has Argued For In Pensions
What We Will Be Arguing For In Future
Some Thoughts On Longevity
But First, A Story About Steam
Engines And A Watch…
WHY PENSIONS ARE IMPORTANT
TO BUSINESS
•
•
•
•
•
•
£2.4 Trillion Asset Pool
Pension Funds Are Major Shareholders
Employees Need To Retire
Employers Need Them To Do So
Role Of The State Must Shrink
Elder Care Cannot Fall On Business
What We Have Argued For
• Raise State Pension Age Towards 70 And
Beyond. Sorry.
• Provide A Decent, Flat Rate, Basic State
Pension
• Reform The Structure Of A “Pension” To Make It
Attractive Again
• Support Older People To Work Longer
What We Will Be Arguing For
•
•
•
•
•
Abolish The Lifetime Allowance
Keep Higher Rate Tax Relief On Contributions
Keep Supporting Older Workers/Entrepreneurs
Views Please – Compulsory Saving?
Views Please – Tax Relief?
Longevity 1
• Average Male Life Expectancy Now 80 – Was 66
In 1948
• Male Age 65 = 17 Years Life Expectancy
• Female Age 65 = 20 Year Life Expectancy
• But Healthy Life Expectancy Just 13 Years And
15 Years Respectively
Longevity 2
• Male 65 Cohort Life Expectancy Forecast To Be 25
Years By 2051
• Females 28 Years
• Population Aged 80(+) To Grow From 2.8 Million In 2008
* To 5.8 Million In 2033
* To 10.6 Million In 2083
• Number Of People Over S.P.A. Will Increase 32% By
2033
• But Number Of Under 16s Will Only Increase By 10%
• Who Is Going To Pay?
Longevity 3
• And It Could Get Even More Interesting
• Who Would Want To Take A Bet?
Conclusions
• Pensions Are Important To Business
• They Will Become More Important
• IoD Is Having Impacts On Policy, And Will Have
More
• Longevity Is The “Elephant In The Room”
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